Monday, May 21, 2012 11:40 AM / Tola Odukoya / dunnlorenmerrifield
 

Analysis
During the review week, secondary market activities for FGN bonds were influenced by the monthly bond auction and release of inflation figures for the month of April. At the midweek bond auction, two (2) bonds were offered i.e. the 15.10 April 27, 2017 (N35.00bn) and 16.39 January 27, 2022 (N35.00bn), and issued at marginal rates of 15.25% and 15.45% respectively. Both securities were reopened. In addition, subscription levels for the instruments were 79.43% and 96.86% respectively. In our opinion, the oversubscription indicates the sustained presence of foreign and institutional investors as they position their respective portfolios to take optimal advantage of the domestic interest rate regime.
 

Also, inflation figures for April 2012 released during the week by the National Bureau of Statistics (NBS) shows an 80-basis-point increase in year-on-year (y/y) headline inflation to 12.90% compared with 12.10% in the previous month. The increase in the headline index was driven primarily by non-food items. Similarly, the monthly composite CPI was higher by 0.13% when compared with March 2012. The index for food was higher y/y by 11.20% and increased by 0.20% on m/m basis whilst core inflation index also rose by 14.70% y/y but inched up marginally by 0.10% on m/m basis. We also note that average yields on government securities are ahead of inflation by c. 100bps.
 

Meanwhile, over-the-counter (OTC) trading remained relatively active as yields moved up in reaction to the release of April 2012 inflation figures. However, we note a cautious trading approach across the market in view of the next meeting of the Monetary Policy Committee (MPC) scheduled for the early part of this week. 
 

Our position on the MPC meeting.  
This week, and in the days beyond, the outcome of the MPC meeting – with emphasis on the policy rate decision – will be crucial in determining the direction of the financial markets. Against the backdrop of the trajectory of inflation, an increase in the MPR will obviously result in further decline in bond prices and sustained inversion of the domestic yield curve and a continued crowding out of the private sector. We therefore maintain our opinion with respect to the reversal of policy on interest rate with a long term view of stimulating growth via domestic production and employment. We believe a reduction in cost of capital in the economy has a direct effect on production and price levels. Therefore, increase in domestic production leads to less reliance on imports thereby easing the pressure on the domestic currency. Our position is underpinned by the sustained increase in inflation and weakening of the currency against the US dollar despite the prevailing interest rate regime. (fig. 3)
 

We however would expect the adoption of other monetary policy tools (reserve requirements, monetary base and SLR/SDR) to execute the prevailing policy stance. For example, in the week ahead we expect a treasury-bill auction during which circa N126 billion will be offered across various maturities. In addition, we anticipate a more aggressive usage of the open market operations (OMO) given that Tbills and FGN bonds worth circa N214 and N245 billion respectively will mature and an expected inflow of circa N769 billion budgetary allocations for the month of April will come into the system.
 

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