Fixed Income Quarterly Q2 2020: Few Places to Hide

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Tuesday, June 23 , 2020 / 03:08 PM / by FBNQuest Research / Header Image Credit: FBNQuest

 

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A brutal global landscape

The international landscape has deteriorated severely this year because of Covid-19, and Nigeria's prospects have been further clouded by the crashing oil price. All forecasts are subject to a wide margin of error, given the unpredictability surrounding the virus. We do not think the Fed funds rate will enter negative territory: that said, the consensus on the FOMC is for no change in rates either next year or in 2022.


Local securities for local players

Against this background, most foreign portfolio investors (FPIs) want out of naira debt securities. First it was the global picture, then the oil price and finally the end to the CBN's supply of NAFEX in late March. Local debt markets are now dominated by domestic investors. The supply of new FGN bonds from the DMO will reach a record this year.   


CBN to muddle through on FX

The CBN will muddle through on its exchange-rate policy. The place of departing FPIs in underpinning reserves will be taken by multilateral lenders, and a small rump of the offshore players will stay put. The CBN will avoid having to make a 'big bang' devaluation but will have to settle for a few smaller adjustments.


The MPC minded to surprise

The MPC surprised with its rate cut of 100bps in May and may well surprise us once more. The broader impact will be muted, however.


Some impact from a record supply of bonds

We think the compression of FGN bond yields has little further to run and is due a modest correction. FGN bond yields in the mid-curve should settle in a 9.00% to 10.00% range this quarter.

 

 

FGN bond yields and the MPR

 

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Source: FMDQ,  FBNQuest Capital Research


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