Bonds & Fixed Income | |
Bonds & Fixed Income | |
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Monday, March 26, 2018 /09:55 AM /FSDH Research
The Federal Open Market Committee (FOMC) of the U.S Federal Reserve
System raised its anchor interest rate, the Federal Funds Rate (Fed Rate), to
1.50% - 1.75% from 1.25% - 1.50%. The FOMC announced the decision to raise the
Fed Rate after its meeting on 21 March 2018. Given the impact of the increase
in the Fed Rate on the global financial market, should Nigeria be concerned?
The hike in the interest rate is in line with the expectation of FSDH
Research. We expect that the FOMC will increase the Fed Rate to 2.25% - 2.50%
by year end. The FOMC notes the strengthening outlook of the U.S economy, the
declining employment rate and the need to sustain inflation rate at 2% as the
major reasons for the increase.
FSDH Research observes that between 14 June 2017 and 21 March 2018 the
yield on the U.S 1.75% Treasury Note 2023 trended up as a result of hikes in
the Fed Rate. We expect that a further increase in the Fed Rate will lead to
additional increase in yield on the Treasury Note. The widening budget deficit
in the U.S also supports increase in yields. Consequently, yields in the global
market may increase.
The yields on the Nigerian Bonds maintained a downward trend since
August 2017 following the strategy of the Debt Management Office (DMO) to
increase external borrowing. The current yields on all the outstanding FGN’s
Eurobonds are lower than the coupon rates, reflecting the low interest rate
environment in the international market.
The FGN announced a drop in borrowing through the FGN Bonds in March
2018. FSDH Research believes that the FGN will increase its borrowing through
the FGN Bonds when the 2018 budget is signed into law, in order to cover its
budget deficit. It may also increase borrowing from external sources in line
with its debt management strategy.
FSDH Research notes that the yields on the FGN Bonds may move up
gradually from the current level before it drops around mid-year. In addition,
subsequent external borrowing may attract higher interest rates as yields in
the global market move up.
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