Bonds & Fixed Income | |
Bonds & Fixed Income | |
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Saturday, February 09, 2019 04:30 PM / Zedcrest Capital
Market Review
Sizeable Coupon Inflows Pressure Bond Yields Lower
The
FGN Bond market opened the year on a slightly bearish note as yields retraced
from the significant bullish sentiments which characterized the later part of
the previous month. Yields however resumed a downtrend, with the most demand
witnessed in the week prior to the January FGN Bond auction, as sizeable coupon
inflows of c.N223bn on four different maturities spurred renewed demand
interests from the local PFAs, with demand pressures further accentuated by the
relative undersupply of bonds at the previous bond auction in Dec 2018. Yields
consequently declined by c.20bps from an average level of c. 15.35% as at
31-Dec-18 to c.15.15% as at 31-Jan-19. The most decline was witnessed on the
long end of the curve (36s & 37s) which compressed by c.50bps given the
DMO’s continued limitation of its Bond Auction offers to the 10-Yr Tenor in Q1
2019.
The
DMO released the much anticipated Q1 FGN Bond offer circular during the month
which showed it plans to raise between N360bn to N440bn in the first quarter of
the year. At the Bond auction for January held on 30-Jan, the DMO offered 50bn
each of the 5, 7 and 10-yr bonds. The auction was oversubscribed by c.131% due
to the significant demand on the 10-year bond. The DMO consequently sold a
total of N116bn with stop rates clearing at an average of 15.27%, c. 15bps
below their previous auction levels.
Renewed Offshore Interests Spur C.75bps Decline In Ntb
Yields
The
Treasury bills market witnessed increased bullish sentiments over the course of
the month, largely due to increased demand from FPIs who showed more preference
for the relatively higher yields and shorter duration exposure in the Nigerian
T-bills space. The Downtrend in yields were however concentrated on the shorter
end of the curve, with the longer end of the curve closing on a relatively flat
note due to the relatively higher yields on the longer tenured maturities
offered at the CBN’s regular OMO auctions.
The
DMO released its Q1 NTB Calendar at the start of the month, indicating its
intentions to rollover a total of c.N823bn of the N985.92bn NTB maturities in
Dec 18 - Feb 19. In Jan 2019, the DMO sold a total of c.N481.47bn T-bills of
the c.N644.27bn that matured at three separate auctions. Stop rates at the auctions cleared at an
average of 10.97%, 13.23% and 14.83% on
the 91, 182 and 364-day tenors respectively, and were c.14bps above their
levels in Nov 18 when the last NTB
Auction was held.
Fx Rates Strengthen Amid Renewed Fpi Inflows And
Sustained Fx Interventions
On the back of the renewed FPI inflows in the I&E market (c.$1.32bn) which was c.187% higher than the inflows in the previous month, and the sustained FX interventions by the CBN, FX rates appreciated marginally in the I&E (0.38% to N363.03/$), BDC (0.22% to N358.00) and interbank segments (0.07% to N306.75/$). The Naira however depreciated by c.0.27% to N365/$ in the parallel market due to increased demand from unofficial sources. The CBN Maintained its regular wholesale and retail FX interventions in the interbank market, whilst injecting a total sum of $453m in the I&E market. It also maintained its $75,000 weekly sales to the 4,115 active BDC operators.
Nigerian Eurobonds Rally Amid Softening Global
Headwinds, Em Resurgence
The
Nigerian Sovereign Eurobonds have rallied by c.108bps from an average of
c.8.50% as at 31-Dec-18 to c.7.22% as at 31-Jan-19. The significant downtrend
in yields came on the back of resurgent interests in EM assets due to the
softening tone in the US-China trade dispute, the relative uptrend in oil
prices and most especially the slightly more dovish stance by the US Fed, all
off which posit a strong case for EM bonds which were significantly downbeat in
the latter part of the previous year.
Yields
on the Nigerian Corporate Eurobonds also declined by an average of c.107bps
m/m, with the highest decline witnessed on the DIAMBK 19s which retraced
further by c.500bps from the massive selloff earlier occasioned by its rating
downgrade by S&P, Moody’s and Fitch. Investors showed the most interest for
the Access 21s Snr, Zenith 22s and UBANL 22s amongst the banking names. The
SEPLLN 23s also witnessed a significant rally on the back of its strong
operational results and improved ratings outlook.
Market Outlook
Bullish Fixed Income Trend To Dampen Post Election
Having declined by c.20bps in the month of January, the bond market
re-opened the new month on a significantly bullish note, with yields
compressing further by another 20bps in the week to date. The aforementioned
has been due to significant buying interests from offshores which have fueled
some panic buys amongst local investors as well. The recent events reflect
market expectations for a relatively peaceful conduct of the forthcoming
elections given the current risk on stance. We however expect the bullish trend
to dampen post-election, with yields expected to retrace slightly due to
expected post-election policy lags which should weigh on investment interests
in the medium term.
CBN to Maintain Regular Omo Auctions
Investors are expected to
sustain demand for the higher yielding long tenor (>300day) OMO bills
offered by the CBN, whilst the shorter end of the T-bills curve is expected to
retrace slightly higher, with the CBN expected to further tighten system
liquidity via its liquidity management activities in the money market. The CBN
is expected to sustain its spate of OMO interventions, with c.N1.87trn OMO
maturities expected in the month of February.
Fx Rates To Decline Marginally
In view of the forthcoming elections and post-election events, we
expect the naira to depreciate marginally especially at the parallel market,
due to expected increase in demand for the greenback. We however expect the CBN
to sustain the relative stability of the Naira via its continued FX
interventions across all market segments.
Eurobonds to Sustain Gains
Having rallied
significantly by c.100bps in the previous month, we expect the Nigerian
Eurobonds to remain relatively stable in the month of February as investors
interest remain relatively robust for Hard currency EM bonds due to the
slightly more dovish stance by the US FED and positive comments from the
US-China Trade Negotiations. Slower growth and increased volatility in advanced
markets are also forcing portfolio managers to refocus attention on EM assets
which were significantly downbeat in latter part of the previous year. The
recent uptrend in oil prices given the sanctions by the US on Venezuela and
OPEC+ cuts also bode well for the Nigerian Eurobonds in the near term.
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