Proshare Confidential | |
Proshare Confidential | |
10649 VIEWS | |
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Monday, March 05, 2017 06:30 PM / Proshare Research
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Over
the years, series of culminated events have triggered an asset rotation which
favoured fixed instrument thus leading to a catapult in outstanding treasury
bills from N5.36 trillion in January 2016 to N10.39 trillion in December
2017. This is reflective of more than a 100% increase in outstanding
treasury bills and about 0.094 to GDP.
The
catapult initially precipitated from earlier capital controls which locked
government out of the external funding and provided limited room to circumvent,
as it was forced to rely heavily on the domestic market. In addition,
government expansionary policy in response to the cycle fuelled the
rise.
However,
the evolving dynamics forced the yield curve to a humped shape, as liquidity
supported the short term paper and expectation became murky regarding long term
instrument. The end product of such development was an average monthly
trade of N4.389trillion over a sample space of 24 months, making it 85% of the
total fixed instrument traded.
As
inflation began to dip and the spread between the 3 year and 10 year bond fell,
yield expectation began to provide the scaffold for the long term instrument.
Concurrently, the fiscal conduit began to switch to more long term bonds
coupled with the intent of circumventing the domestic money market.
In
addition to a more faint use of short term financing coupled with fizzling
inflation, this weighed on yield. However, convexity remains largely intact as
short term bills remain reluctant to stay put at the natural rate.
The
earlier humped shape, which was pronounced on the 6 month, 1 year and 2 year
instruments, gave way for a hollow shape. The dynamic trigged a reshuffling
that began to allow the absorption of long term instrument.
Though
the 3 year and 10 year bond are close in spread, the yield has fallen short of
the expectation. The expectation concern has pushed the market into a mild
bearish position.
The
structural nature of the fixed income market remains largely captive, which is
largely driven by government instrument. Thus, intuitional framework that
bolster the formal sector, improve corporate governance, ensure transparency,
credit rating, stable inflation are strong and essential ingredients that
support corporate debt. The ability to reduce the crowding out effect will
certainly provide the needed lift for commercial paper, which has been
experiencing weak appetite.
This
edition of Proshare Confidential takes a look at Money market rates such as the
maximum lending rate, 6 month deposit rate and 12 month deposit rate, in order
to highlight the wide net interest spread that is prevalent in the money
market, compared to its peers in both BRICs and Sub Saharan frontier markets;
while considering the substitution role it plays on the short.
Nigeria
has had the highest net interest spread largely due to structure flaws of the
economy and the high cash reserve ratio. The analysis from our study revealed
that the maximum lending rates have developed an upward bias whereby becoming
repulsive to the floor. Therefore, we pointed out that addressing the
heavy dependence on cash will help to resolve the cash miss match responsible
for such bias.
The
study also took an in depth look at the monetary aggregates, given the inter
play with the money market. The result pointed out that the crowding out effect
has fuelled credit to government and created a slow growth in quasi money. In
the same vein we observed the following:
· Resurgence in Net foreign asset
of deposit money Banks
· Relatively weak cash to deposit
ratio
· Narrow money multiplication was
weak due to high base, regardless of the uplift in narrow money
· Policy makers hit both
their net foreign asset and narrow money target, but fell short with
regards to broad money
· Policy makers hit income
velocity of narrow money but fell short with regards to income
velocity of broad money
Looking at foreign economies, this edition of
Proshare Confidential presents the backwardation in oil price following the
rise in rigs in the United States coupled with the return to surplus stock is
weighing on price.
For further details contact research@proshareng.com
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Previous Proshare Confidential Report (s)
1. Boosting Investments:
Nigeria's path to growth
2. The
Mundell-Fleming Trilemma: The Nigerian Experience
3. PMA Rates Clear lower
as DMO Unexpectedly Cuts offer Size in half
4. VFD Group Achieves 175%
Subscription on Debt Note Offer
5. CBN Moderates System
Liquidity with c.N250bn OMO Sales ahead of T-bills PMA
6. Funding Rates decline
on FAAC Expectations
7. Robust System Liquidity
to Drive Buying Interest as PMA holds on Wednesday
8. Summary of Nigeria’s
USD2.5 Billion Eurobonds Priced in February 2018
9. Bond yields close
positive on renewed local interest
10.
A little Breathing
Space for the DMO