Money Market: The Folk Road


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.

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Proshare Nigeria Pvt. Ltd.

Previous Proshare Confidential Report (s)

  1. The Headache of Missing Targets – Jan 2018
  2. 2018 Outlook on the Nigerian Economy: The Need for an Even Keel – Dec 2017
  3. Nigeria External Economy and the White Noise of Import Dependency – Nov 2017
  4. States and the Rising Weight of Debt – Oct 2017
  5. Money Supply: Reeling from Policy Response – Sep 2017
  6. How Rail and Energy Will Deliver a Robust Economy for Nigeria – Aug 2017
  7. Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017
  8. The Nigerian Debt Conundrum and the Need for Automatic Stabilizers – Jun 2017
  9. Article IV vs. ERGP - The Third Way – May 2017
  10. Lifting The Veil off The Financial Sector – Apr 2017
  11. Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017
  12. FX Utilisation in January 2017-Symptoms of An Opaque Structure – Feb 2017 

Proshare Nigeria Pvt. Ltd.

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