NCM2020 (26) - Fixed Income Market Did Well in 2019 For Both Wholesale and Retail Investors

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Saturday, February 15, 2020 / 06:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics

 

Fixed Income Market Review and Outlook

 

The fixed income market in 2019 did splendidly well for both wholesale and retail investors in the first three quarters of the year. The yields on treasuries remained in the lower to middle double digits ranging from 10.5% to 13.5%.

 

The frequent resort to the short-term treasury market by the Federal Government to fund short-dated fiscal obligations put pressure on the local money market and kept Treasury yields up, making them attractive to both foreign portfolio investors (FPIs) and domestic portfolio investors (DPIs). 

 

Treasuries became particularly attractive in 2019 as the stock market rallied downwards with the NSE ASI losing -14.60% of its value by year-end December 2019.  

 

In 2017 treasury rates were between 13.5% in June 2017 and 12.8% in December 2017; in 2018, rates had started falling with the T-bill rate in January 2018 at 12.27% by the end of Q2 2018 treasury bill rate had fallen to 10.5% (see chart... below).

 

Chart...  Nigerian Treasury Bill Rates (%) 2017-2018

                

Proshare Nigeria Pvt. Ltd.

Source: CEICDATA.COM/Central Bank of Nigeria (CBN)

 

Treasury returns in 2019 were amongst the highest (but below 2012 and 2017) in the last two decades, rising from 8.89% in 2006 to 8.20% in 2008 before rising to 9.70% in 2011. At the beginning of President Goodluck Jonathan's administration in 2011 with greater use of treasury bill instruments to fund deficits in the government's fiscal position, T-bill rates rose to 13.64% in 2012 before falling to 10.85% in 2013 and 10.54% in 2014. With the end of the Jonathan administration and the commencement of the President Muhammadu Buhari Presidency, T-bill rates had slumped to 9.39% as higher oil prices between 2013 and 2014 enabled the Jonathan administration to close its fiscal gap. Since the beginning of the Buhari administration in 2014, the widening fiscal deficit has forced T-bill rates up, pushing them to rise to 10.14% in 2016 and 13.41% in 2017 (see chart…below).

 

Chart...Nigeria Treasury Bill Rates (%) 2006-2017

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Source: CEICDATA.COM/Central Bank of Nigeria (CBN)

 

In 2018, yields were slightly under 12% in Q1 2018 but continued to slide to between 10% and 11.5% in the remaining three quarters from the beginning of Q2 2018. The following year 2019 saw treasury rates alternate between 10% and 11.10% before slumping to 7.79% 0n November 13, 2019, and 6.49% on November 27, 2019. The flattening yield on T-bills has led to private domestic investors holding higher cash balances as they search for alternative investment opportunities (see chart...below).

 

Chart...Marginal Treasury Bill Rates January-November 2019

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Source: Debt Management Office (DMO)

 

The Eurobond Dance

 

Nigeria's Eurobond yields in 2019 were high enough to keep FPIs interested and committed to the issued instruments. Nigeria's short-dated US$500m bond with a January 2021 redemption date, offers a coupon of 6.75% as against the US$300m diaspora bond which offers a coupon of 5.625% with a redemption date of June 2022. The 2021 bond offered a yield of 3.17% (as against the issued yield of 7%) as of December 31st, 2019, while the 2020 diaspora bond offered a yield of 3.77% (as against the issued yield of 5.63%) as of the end of December 2019 (see Table ...below).

 

Table ...Eurobond Rates for Nigerian Instruments 2019

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Source: Debt Management Office (DMO)

 

The yield curve for Nigeria's Eurobonds has been positive, reflecting adjustments for changing investor-perception concerning the time value of money (TVM). However, with recent concerns about Nigeria's future growth rate and the economy's vulnerability to external economic shocks, yields could turn higher at the shorter end of the bond market as investors demand shorter-dated instruments, thereby forcing up bond prices and reducing yields. The scenario of higher demand for shorter-dated bonds may result in a "kinked" yield curve, with limited demand to create price discovery at the longer end of the bond market (see chart ...below). 

 

Chart...Euro and Diaspora Bond Yields 2019

Proshare Nigeria Pvt. Ltd.

Source: Debt Management Office (DMO)

*dates in the chart above refer to months and years to maturity of the bonds


Table...Yields and Maturity Profile of Nigerian Domestic Bonds

Auction Date

5 years

7 years

10 years

20 years

30 years

 

 

 

 

 

 

December 18, 2019

11.0000%

N/A

12.0000%

N/A

13.0000%

November 20, 2019

12.0000%

N/A

12.9300%

N/A

13.3900%

October 23, 2019

14.0500%

N/A

14.2300%

N/A

14.6000%

September 25, 2019

14.3900%

N/A

14.4300%

N/A

14.6400%

August 21, 2019

14.2900%

N/A

14.3900%

N/A

14.5900%

July 24, 2019

13.3500%

N/A

13.6400%

N/A

14.1200%

June 26, 2019

14.3000%

N/A

14.5000%

N/A

14.6800%

May 22, 2019

14.3000%

N/A

14.5000%

N/A

N/A

May 22, 2019

14.1100%

N/A

14.2400%

N/A

14.4900%

April 24, 2019

14.5000%

14.5500%

N/A

N/A

 

March 27, 2019

13.5000%

13.5000%

13.5000%

N/A

 

February 20, 2019

14.5200%

14.7999%

14.9390%

N/A

 

January 30, 2019

15.2000%

15.2500%

15.3500%

N/A

 

Source: Debt Management Office (DMO)

 

Fixed Income and Currency-FMDQ Market in Relief

 

The fixed income and currency (FIC) market turned down a notch on a Month-on-Month basis in 2019 compared to 2018 but on a Year-on-Year basis, the markets were upward-looking:

 

  • Turnover in the Fixed Income and Currency (FIC) market for the month ended January 31, 2019, was N15.08trn, representing a -14.85% (N2.63trn) Month-on-Month (MoM) decrease on the turnover of N17.71trn recorded in December 2018, and a +28.78% (N3.37trn) Year-on-Year (YoY) increase 
  • The Treasury Bills (T-bills) and Foreign Exchange (FX) market remained the major drivers of turnover in the FIC market, jointly accounting for 78.69% of turnover in January 2020 or higher by +2.21% from their contribution to turnover in December (76.48%). T-bills trades were the largest activities on the FMDQ market in 2019, followed by FX transactions (see chart...below).


Chart...Over-The-Counter FMDQ Trade Activity 2019

Proshare Nigeria Pvt. Ltd.

Source: FMDQ Exchange

 

Do feel free to share your opinions/observations and feedback with us vide content@proshareng.com and/or research@proshareng.com


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