Fixed Income Quarterly Q3 and Q4 2021: The Fiscal to the Fore

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Tuesday, September 28, 2021 / 09:45 AM / by FBNQuest Research / Header Image Credit: iStock

 

Not for the first time, thanks due to the oil price

The rebound in the global economy has come to Nigeria's rescue and delivered a firmer oil price. The unprecedented discipline of OPEC+ in restoring supply at a measured pace has played its part. Along with the allocation of SDRs and the chase after yield by foreign portfolio investors, this made for a successful Eurobond issue this month. Prospects for domestic growth and market-friendly reform are dull but the decent external balance sheet resonated with investors.


Huge supply of FGN naira paper for the market

Fiscal matters remain the principal macroeconomic driver of the fixed income market. The FGN's stance is expansionary, which means a large supply of new paper for the DMO to sell. It has a record domestic funding target this year, which is 40% higher than 2020's. It is on track to hit the target due to the steady bid by the domestic non-bank institutions, the predominant players.   


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No change in the CBN's position on FX

The CBN has done the easy part on the wish list of the multilaterals by scrapping the preferential official fx rate and moving to effective unification. However, it has not bought into "market-determined" rates because it likes to guide and manage. Better prospects for the oil price and reserves are on its side, and our take is that the monetary authorities will get by with a few small adjustments.


A temptation for the MPC to raise rates

Inflation is now on a downward track. We think that the committee will revert to gentle tightening to help it on its way next year once the foundations for growth are more secure.


FGN bond yields to tread water

FGN bond yields have recovered this year in response to the huge deficit financing requirement. The gap may well rise above the level in the 2021 budget, which would be funded outside the market. The DMO can count on steady institutional demand at auction. We see yields in the mid-curve stable with a small bias to the downside in a range of 10.50% to 11.50% in the quarter ahead.

 

FGN bond yields and the MPR (%)

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Source: FMDQ, FBNQuest Capital Research


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