Fixed Income Quarterly Q4 2019: Time to Pause for Breath

Monday, December 16, 2019   /2:12 PM  / By FBNQuest Research / Header Image Credit: Eagle Investors

The global picture a little better

The international landscape has slightly improved over the past quarter. Talk of global recession is now rarely heard, and leading equity markets remain in good shape. The US Federal Reserve has called a halt to its easing and does not see any change in 2020 unless the external environment deteriorates.  Uncertainty still hangs over US-Chinese trade relations. The mood music changes almost daily although on balance we see resolution before the US presidential elections in November.

FGN paper very much in demand

The three rate cuts by the Fed and its halt to easing have improved EM investor sentiment. (They have also reinforced the favourable conditions for Eurobond issuance, from which we hope the FGN will choose to benefit.) Nigeria has a good story to tell foreign portfolio investors (FPIs) and returns to match, not least for bills issued within the CBN's open market operations. The main driver of the FGN naira markets in the past three months, however, has been the large-scale buying by domestic banks. Yield on NTBs have practically halved.   

CBN set on its fx policies

The monetary policy committee (MPC) and the CBN like to trumpet the success of their "heterodox" exchange-rate policies. They will only make changes that are unavoidable. Our oil price expectations and our view of FPI sentiment suggest that they will be under no such pressure next year. The external buffer in the form of reserves has diminished but remains adequate.

And MPC set on its stance

We think that the MPC will keep its stance on hold next year. It lacks the correct monetary tools to make an impact and is alert to the needs of FPIs.

Bond yields due for a correction

In our view, the crashing of yields, particularly for NTBs, is unsustainable because of the banks' loan-to-deposit ratio requirements. We see FGN bond yields back in a range of 12.25% to 12.75% at the end of Q1 2020.

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