NSR H1 2020 (11) - Fixed Income - Liquidity Surfeit to Keep Yields Subdued

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Thursday, January 23, 2020 09:52 AM / ARM Research / Header Image Credit: 


In this morning'cut-out of our core strategy document - The Nigeria Strategy Report, we look at the major themes that dominated the fixed income space over H2 2019 and delineate our outlook over 2020.

 

Contrary to our expectations, average fixed income yields suffered massive compression over H2 19. While this was in part fueled by lower paper issuances—predominantly at the short end and less liquidity sterilization by the CBN, the straw that broke the camel's back was CBN's policy directive in October. This directive restricted local non-bank investors from participating in OMO auctions. Consequently, OMO redemptions which would previously have been reinvested in OMO bills had to chase FGN securities, thereby compressing local fixed income yields by 540bps to 7.72%.

 

In determining the yield curve trajectory over the medium term, we take a cue from CBN's actions over the last four months where it increased its tolerance for naira liquidity emanating from OMO redemptions. For us, given that these monies have little propensity to hurt the naira we rule out a reversal in the directive over the near term.

 

Our view is hinged on the apex bank's decision to preserve the interest of foreign investors by granting access to participate in OMO sale and providing ease of exit from their OMO positions. More so, out of the 27.7% OMO bills held by non-bank corporates, we estimate PFA holdings of 17% (~N2 trillion).

 

Given the strict PENCOM regulations that prevents PFAs from directly purchasing dollar with naira contributions, we see little room for these liquidities queuing behind dollars at the parallel market.

 

Against this backdrop, most local institutional investors who hold OMOs are left with no choice than to combine or do either of the following 1.) channel their funds to primary and secondary treasury bills, 2.) invest in banks term deposits, 3.) increase appetite for corporate commercial papers or 4.) increase exposure to equities. That said, we envisage buy pressure to persist over the near term following expected liquidity surfeit in the system. Against this backdrop we see scope for lower fixed income yields over H1 2020.

 

Figure 1: Maturity Profile over 2020

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   Source: FMDQ, ARM Research                                 


Related News from ARM's H1 2020 Nigeria Strategy Report  

  1. NSR H1 2020 (10) - Monetary Policy - CBN Caressing Both FPIs and Economic Growth
  2. NSR H1 2020 (9) - GDP - Economic Growth Should Remain Anemic, Flatlined at 2.2%
  3. NSR H1 2020 (8) - Inflation Set for a Double Whammy in 2020!
  4. NSR H1 2020 (7) - Currency - How Long Can The CBN Keep Up?
  5. NSR H1 2020 (6) - Balance of Payment - Edge of the Cliff
  6. NSR H1 2020 (5) - EM Portfolio Flows - Happy Days Ahead for EM Foreign Portfolio Flows
  7. NSR H1 2020 (4) - Commodity Prices - Contrasting Fortunes for Global Soft Commodity Market
  8. NSR H1 2020 (3) - Global - After a Slowdown in 2019, 2020 Growth Receives a Timely Boost
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Related News from ARM's H2 2019 Nigeria Strategy Report  

  1. NSR H2 2019 (12) - Fixed Income - Will The CBN Give In To Liquidity Pressure?
  2. NSR H2 2019 (11) - Monetary Policy - Unorthodox Policies to Dominate
  3. NSR H2 2019 (10) - Inflation - A Tale Of Two Seasons
  4. NSR H2 2019 (9) - Currency - Near-Term FX Stability Remains Intact
  5. NSR H2 2019 (8) - Balance of Payment - Foot On The Pedal
  6. NSR H2 2019 (7) - Nigerian Fiscal - CBN Backdoor Financing Will Constrain Local Borrowing
  7. NSR H2 2019 (6) - GDP - Modest Growth, Not Much Solace
  8. NSR H2 2019 (5) - Crude Oil - Clearer Path, Not Entirely Great
  9. NSR H2 2019 (4) - EM Capital Flows - Break Out The Champagne
  10. NSR H2 2019 (3) - Commodity Prices - Mixed Bag For Global Soft Commodity Market
  11. NSR H2 2019 (2) - MEA Region - Neither Booming Nor Collapsing
  12. NSR H2 2019 (1) - Global - Wobbly Growth Picture, More Tilted To The Downside

 

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Related News from ARM's H1 2019 Nigeria Strategy Report  

1.       NSR H1 2019 (9) - Fixed Income - Will Yields Hump or Shift?

2.       NSR H1 2019 (8) - Nigerian Fiscal - More Strain On FG Finances

3.       NSR H1 2019 (7) - Monetary Policy - Maintaining The Narrative

4.       NSR H1 2019 (6) - Nigerian Inflation - Boiling Below The Surface

5.       NSR H1 2019 (5) - Currency - A Test Of Nerves And Resilience

6.       NSR H1 2019 (4) - Domestic Economy - Stable Growth In Dire Need Of Fresh Impetus

7.       NSR H1 2019 (3) - Crude Oil - Not Great But Not All Gloom Either

8.       NSR H1 2019 (2) - MEA Region: A Year of Fragile Growth

9.       NSR H1 2019 (1) - Global Growth: New Year, Same Rhetoric, Matching Growth

 

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Research 234 (1) 2701653  research@armsecurities.com.ng

 

Related News from ARM's H2 2018 Nigeria Strategy Report  

1.       NSR H2 2018 (15) - Equities: The Divergence… Fundamentals or Sentiment?  

2.       NSR H2 2018 (14) - Fixed Income: Have Yields hit the bottom?

3.      NSR H2 2018 (13) - Monetary Policy: A Classic Catch-22, Where will the Balance Tilt?

4.      NSR H2 2018 (12)- Nigerian Inflation: Approaching an Inflection Point

5.      NSR H2 2018 (11)- Currency: The Battle for Naira Stability

6.      NSR H2 2018 (10)- Balance of Payment: CA Surplus Recycled Through Record Portfolio Outflows

7.      NSR H2 2018 (9)- Growth to Run Above 2%, But Nearing a Cyclical Peak

8.     NSR H2 2018 (8) - Game Of Thrones! How They Stack Up In the Race

9.      NSR H2 2018 (7) - Pension: Multi-fund - Will Variable Assets Blow-Up or Blow Over?

10.  NSR H2 2018 (6) - Nigerian Fiscal: Déjà Vu All Over Again?

11.   NSR H2 2018 (5) -EM Portfolio Flows: Slowing the Flow, But Far From A Dribble

12.  NSR H2 2018 (4) - Commodity Prices: Peaks and Troughs Across Soft Commodities

13.  NSR H2 2018 (3) - Crude Oil: Stability Gains Ground in Titans' Tug of War

14.   NSR H2 2018 (2) - A Tale of Resolve and Recovery Across MEA

15.   NSR H2 2018 (1) - Supportive Global Monetary Policy to Consolidate Global Growth Over 2018

 

 

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