Fixed Income Market to Remain Bearish – Analysts
CardinalStone, a multi-asset investment bank has said in a report that sentiment in the fixed income market is likely to remain bearish in the current month. The average yields on Federal Government bonds and Nigerian Treasury Bills (NTBs) increased by 42 basis points and 97 basis points, respectively, in April, the report stated.
According to the firm, this happened after an 8.1% month on month contraction in cumulative maturities that dampened liquidity in the financial system. Consequently, analysts spotted that money market rates rose by about 145 basis points to an average of 8.0% in the review month.
Elsewhere, CardinalStone said there was also an indication of more aggressive borrowing in the April bond auction, wherein the Debt Management Office (DMO) allotted N349 billion – 1.55x the offered amount. Due to the lower liquidity, the demand was relatively weak, with the bid-cover ratio touching a four-month low of 1.82x, according to CardinalStone.
The firm said the upper end of the bid range at 14.0% indicated that the auction may have closed higher, but for the 37.0% allotments to non-competitive bidders. In the report, CardinalStone said the NTB market traded on a lull note as the disparity between bid-ask spread remained prevalent.
It was noted that only a few trades were consummated in the secondary market in April, with NTB auctions being livelier.
“In our view, the hush trading activity levels and bearish sentiment can partly be explained by the widespread, which continues to drive a rotation into corporate issuances and placements, both of which currently trade at premiums of between about 300 and 350 basis points over the one-year secondary market NTB yield of 4.76%”.
Cardinalstone expects bearish bias to persist in May. It said its expectations of higher borrowing and lower liquidity may continue to dictate the direction of market activities in the near term. READ: Fixed Income Market Sees Yields Decline as Liquidity Pressures Ease
“Our position on the former is supported by the senate’s recent approval of an additional N1.0 trillion for PMS subsidy, which could translate to higher-than-expected domestic borrowings given the tightening global financing conditions.
“On the latter, a 14.5% decline in cumulative maturities will likely pressure banks’ liquidity position and drive placement rates higher”, the multi-asset firm stated. Elsewhere, market watchers are likely to be keen on May’s MPC meeting with inflation ticking upwards and monetary tightening intensifying across global markets.
Nigerian Banks Become Net Borrowers
Liquidity moderation in the financial system triggered a change in the disposition of participants at the Central Bank of Nigeria (CBN) discount window, CardinalStone said. Analysts also noted that banks switched to becoming net borrowers in April from net depositors in March.
The firm had earlier projected that lower system liquidity and the more aggressive borrowing plan of the government could fan bearish sentiments in the Nigerian fixed-income market. # Fixed Income Market to Remain Bearish – Analysts