FI Markets Closes Bearish as Series of System Outflows Takes Funding Cost into Double Digits

Sunday, January 24, 2021 / 6:00 AM / Zedcrest Capital / Header Image Credit: Atlas Appraisal

Below are highlights of trading activities in the fixed income and forex market on January 22, 2021.

FGN Bonds

The bears dominated the FGN bond market closing the week as traders remained aggressively offered across the curve with very few bids to match. The weak appetite for FGN bonds despite the scarcity of short-term instruments can be attributed to the uncertainty surrounding monetary policy, which is also further compounded by the deep negative carry on bonds at the moment (Avg. FGN bond yields - Inflation). Most investors have resulted in staying at the short end of the curve, pending when there is more clarity in the interest rate environment. We believe the MPC meeting scheduled to hold next week will give more direction, especially to long-duration investors who have been victims of large valuation fluctuations on their trading portfolios in recent months.

We also expect trickles of demand to flow into the bond space next week as inflows from bond coupon payment hit the system; however, we anticipate that the market weakness would persist in the short to medium term.

Treasury Bills

The Treasury Bills market closed the week on a tranquil note, as bearish sentiments stayed firm, triggered by the depressed system liquidity and profit-taking activities by yesterday's OMO bills holders. At the early hours of trading, we saw slight interest in the new one-year OMO bill, which traded at 2.80%. However, as the CRR debit by the apex bank impacted the system, dealers immediately improved their offers by about 40bps to 3.20%. Consequently, yields across the OMO/NTB bills curve swelled by an average of 100bps.closing the week.

However, we expect the market to remain order-driven next week, with a slight bearish bias as market participants seek to take profit on their positions towards month-end.

Money Markets

Interest rates leaped into double-digit figures today as expected, spiking by over 1000% to close at 10.00% and 10.50% for the OBB and OVN rates, respectively. System Liquidity is estimated to close the week at c. N21.9Bn positive following Retail FX intervention (c. N300Bn), FGN Bonds Auction funding (c. N233.27Bn), and additional CRR (c.316.5Bn) debit by the Apex bank.

We expect interbank funding rates to remain elevated opening next week. However, inflows from OMO maturities and bond coupon payment should ease system liquidity later in the week.

FX Market

The FX Market closed the week on a muted note, as traded volumes in the I&E FX Window dropped by 42% D/D. Demand from foreign portfolio investors persisted with little supply to match; consequently, the rate closed at N394.17/$ (0.04% D/D depreciation).

The Naira lost ground at the parallel market against the greenback due to no collection by the BDCs from the Apex Bank while demand remains persisted. The cash rate closed at N475.50/$ (0.42% D/D depreciation), while the transfer rate remained unchanged to close the week at N486.00/$.

Eurobonds

The rally in the NIGERIA Sovereign tickers fizzled out closing the week, as we saw improved offers in the market matched with less aggressive bids while some players looked to book profits from gains over the past ten days. Consequently, yields expanded by an average of c.3bps across the sovereign curve D/D. Other SSA papers (GHANAs, ANGOLAS, IVYCSTs) also traded calmly, with yields closing flat D/D.

The NIGERIA Corps had a bullish session, with most buyers seen across most tracked papers pushing yields further down D/D. The ACCESS 2021s and SEPLLN 2022s were the day's biggest gainers, dipping by 19ps and 66bps, respectively.

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