FMDQ: Gradually Drawing Down the Curtains


Friday, September 15, 2017 3:55PM / Proshare Research

Preamble: Macro
In recent times fiscal multipliers have being used as a tool to prop up  the real economy so as to stall the decline in productive activity. Ultimately, it has been a tool used to kick start growth again and bring an end to the growth break.

Along the way, the fiscal side have becomes domineering and it has led to deeper government participation in the money market. Evidently, such participation as seeped further into the secondary market.

Policy response by the apex bank has largely been in a hybrid form; where both monetary aggregate and price have gone through some form of fine tuning in order to offset inflation.

Obviously, the persistent dynamic sterilization carried out by the apex bank underline its policy target of curtailing monetary aggregate, especially narrow money.

The ripple effect has been an elevation in short term yield on the yield curve when compared to the previous horizon. Achilles effect on the short term yields on the yield curve became inevitable.

Holistic Picture

The total value of derivatives traded over the counter (OTC) at the end of July stood at N11.56trillion, thereby reflecting an 8.6% decline compared to the previous month. The decline sustained was triggered by 19% and 49% fall in the volume  of  fixed instrument, which span below one month and those that have a term between 30 to 90 days (1 to 3 months) compared to the previous month.

Therefore, the ratio of total turnover of derivatives traded across board to broad money at the end of July stood at 0.52, compared to 0.58 in the previous month.

On the other hand, the ratio of total value of derivate traded to broad money under the same period stood at 0.1176 which was softer than the previous month of 0.128.

Fig 1:  Turnover of total derivatives

Source: FMDQ Proshare Research

Outstanding treasury bill and Federal Government bonds spike by 6% and 21% respectively to reach N9.06 trillion and N8.56 trillion (Fig 1). When compared on a year on year basis, outstanding Treasury bill and Federal Government bonds rose by 36.85% and 56.72% respectively.

The elevation in short term yields on the yield curve coupled with increase incursion by the fiscal end into the fixed income space has not only increased activity in the derivative market.

Concurrently it has led to an astronomical increase in the quantum of both outstanding treasury bills and Federal Government Bonds.

Fixed Income Market

Turnover in fixed instrument for the month of July stood at N5.06 trillion, which is 18.9% slump compared to the previous month.  Treasury bills traded within the period was N4.58 trillion, which makes it 90% of the total fixed instrument.

As earlier mentioned the shrinking in short term fixed instrument has    forced the value of treasury bills to soften by 15.9% when compared to the previous month. The total of Federal Government Bonds stood at N476billion, thereby making up 9.42% of total fixed instrument.

More importantly the average yield of treasury bills over the last seven months stood at 0.585.  Obviously the earlier gain, accrued monthly to short term yields on the yield curve is growing thinner. In return a more stable yield across the curve seems to take hold of the underlying asset, save for both the one month and 3 year term respectively (Fig 2).

As concern on whether the curtain is gradually being  drawn down on the short term yields on the yield curve. The possibility of refinancing 3 billion dollars in Eurobond tends to ripen those concerns further and how?

Firstly, it falls in line with the fiscal ends willingness to absorb more foreign debt, in order to dilute the   domestic debt concentration in its existing debt universe. Thus, reducing the 84% composition held by domestic debt to 60% on the medium term.

Expectedly, as money stock increases accompanied with the ability to short circuit to crowding out, a blunting of short term yields on the yield curve becomes imminent.

The emerging dynamic between both the external and domestic economy could pile pressure on the current account if not properly managed on the short term. Especially for a country which has not recovered completely from a trade shock.

Fig 2: The Average Change in Yield across the Yield Curve Board

Source: FMDQ Proshare Research 

Fig 3: Spread between 10 year and 3 month underlying asset

Source; CBN, Proshare Research  

Data available over a 15 month period showed that changes in inflation were correlated with the spread between the 10 year bond and 3 month treasury bill at 0.37: Thus showing some relative degree of impact on the spread (fig 3).  

In addition, stronger inflation correlation coupled with more sustained period of   positive   spread will pre-empt a decline in rates.  At the same time, we don’t see expected inflation forcing monetary authorities to shave the natural rate for the time being.

Money Market 
The total value of underlying asset designated as repurchase agreement or buy back traded in the month of July stood at N3.28 trillion. Thereby shrinking by 6.67% on a month on month basis but still maintains a buffered weight of 22.27% when compared on a year on year basis. Unsecured placement rose by 9.39% to reach N146.9 billion in the month of July.

Fig 4: Open buy back trajectory for both June and July

Source: CBN Proshare Research 

Although currency in circulation plummeted by 5% compared to the previous month of June, on the other hand the Nigerian interbank offering rate remained calmed with an average of 18%. 

Moreover sustained spike earlier witness in June seem to have fizzled off in July; thus the average open buy back rate  stood at 18.29 compare to an average of  48 in June.  

Foreign Exchange 

Fig 5:  Foreign exchange Turnover 

Source; FMDQ Proshare Research

Transaction in foreign exchange in the month of July stood at $7.71 billion, thereby slumping by 9.5% compared to the previous quarter. The total amount foreign exchange sold by the apex bank in the month of July stood at $1.17, reflective of a 19.8% fall compare to the previous quarter. 

More importantly, transaction in the investor and export window rose marginally by 2% to reach $ 1.85 billion. Therefore the total value of trade within the investors and export window as at inception to July stood at $4.85 billion. The emergence of the Investor and export channel seem to have rubbed positively on the Naira. Evidently such channel has wrestled the Naira from earlier currency over runs.  More importantly the investors and expenditure window validates miles (2003) position, that the exchange channel has a more implicit impact on real asset compare to other underlying asset.  

Fig 6: Trajectory of the Official and Parallel Rate

Source: FMDQ, Proshare Research  

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