Fixed Income Q2 2021: Rising Supply of Paper, Wider Yields

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Friday, June 25, 2021 / 03:58 PM /  By FBNQuest Research  / Header Image Credit: FBNQuest 


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  • A helping hand from the oil price: The recovery in the global economy following some successful vaccination programmes has proved a relief. It has brought a strong rebound in the crude price, which has rescued non-diversified oil producers such as Nigeria. Domestic growth prospects are still dull, but the higher oil price provides some support for FGN revenue collection, the current account, official reserves and the naira exchange rate.
  • Another record for issuance of FGN naira debt: The oil price will underpin the credit story in the FGN's rumoured return to the Eurobond market. This is still very much an issuer's market. The Debt Management Office (DMO) also has an unprecedented domestic funding target, which is 40% higher than 2020's (itself a record by a wide margin). It is on track to hit the target through its monthly bond auctions but at a price, in the form of higher borrowing costs.   
  • Continuity in the CBN's position on fx: CBN thinking on fx is unchanged. It has taken a significant step towards unification by dispensing with the preferential official rate. However, it likes to guide and manage. Our view is also unchanged. Supported by improved prospects for the oil price and reserves, we believe that the authorities will get by with a few minor adjustments.
  • Hints of orthodoxy in the MPC: Our hunch is that the committee will take an orthodox stance and revert to gentle tightening in the face of stubbornly high, albeit slowly declining, headline inflation.
  • A bit more FGN bond yield widening on its way: Textbook relationships in domestic debt markets are being rebuilt. The supply of new FGN bonds has soared due to the record projected FGN deficit this year and yields have responded conventionally. We see a little more widening over the next three months, with yields in the mid-curve up to a range of 13.50% to 14.00%.

 

FGN bond yields and the MPR (%)

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Source: FMDQ, FBNQuest Capital Research

 

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