MONTHLY FIXED INCOME MARKET REPORT

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MACROECONOMIC HIGHLIGHTS

The inflation rate dropped to 16.10% in June from 16.25% in May, marking a fifth consecutive decline in inflation since January 2017. The Food index however rose by 19.91% YoY, indicating continued pressure on food prices. The CBN retained its MPR at 14.00% at the MPC meeting held on the 24th and 25th of July, warning on the need to maintain cautious optimism as the country’s economic recovery remains fragile. The official exchange rate and gross foreign reserves appreciated MoM as the Brent crude price rose above the key resistance level of $50.00 pb to close the month at $51.91pb. Positive gains in the equity market were sustained in the month of July with a 7.86% MoM increase in the equity market capitalization, buoyed by positive macroeconomic expectations and favorable earnings releases by companies.

Indices31-Jul30-JunChange (%)
Inflation (YoY)16.10%16.25%0.15
Exchange Rate (N/$)305.65305.900.08
Gross Foreign Reserves$30.77bn$30.27bn1.65
Brent Crude$51.91$47.948.28
Equity Market Cap12.3511.457.86
Aggregate GDP (Q1-17)N26.03trn0.52
MPR (Jul – 17)14.00%0.00

FIXED INCOME: MARKET SUMMARY

The Fixed income market traded a total of N4.87trillion in value for bonds and T-bills in 16,224 deals in the month of July. This was 12% lower than the total traded value of N5.51trillion in the previous month. The Bonds and T-bills traded at 31% and 9% lower than the previous month figures with turnover falling to N49billion and N4.4trillion in 1,580 and 14,644 deals respectively.

Market Activity Summary
SecurityDealsValue (N’billions)MoM Change
Bond15800.4931%
T-Bills146444.879%

BONDS

Bearish sentiments prevailed in the FGN Bond space in the month of July with average bond yields for the month rising by 6bps to 16.22% from 16.16% recorded in the month of June. This was largely due to weak demand for bonds coupled with tactical switches by portfolio managers from bonds into the higher yielding treasury bills. We expect this trend to be sustained this month as the CBN maintains it hawkish monetary stance.

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T-BILLS

The average treasury bill yields declined further in the month of July by 35bps to 19.26% from 19.61% in the month of June. This was due to buoyant liquidity experienced in the money market for most part of the month, which fueled demand especially on the short end of the curve. We expect yields to fluctuate in tandem with the aggregate naira liquidity in the system with more demand skewed to the long end of the curve. The CBN continued with their tight policy stance, selling a total of N549billion OMO T-bills at an average rate of 18.27% vs. OMO repayment of N318billion. A total of N563billion OMO T-bills will mature this month . We expect the CBN to continue with their aggressive liquidity management via OMO T-bills sales to curb inflationary pressures and maintain domestic currency stability.

AUCTIONS

The CBN sold a total of N381.96billion in Treasury bills at its primary market auctions conducted on the 5th and 19th of the month, with rates on the 91day, 182 day and 364 day bills clearing at an average of 13.47%, 17.45% and 18.58% respectively, slightly lower than the average clearing rates (13.50%, 17.40% & 18.67%) in the previous month. The DMO sold a total of N129.16billion in 5yr, 10yr and 20yr bond maturities on the 12th of the month with rates clearing at an average of 16.25%, 6bps higher than the previous month rates (16.19%). Auction Demand remained skewed towards the long dated maturities (10 & 20yr) as short term investors remained enticed by higher rates in the T-bills space.

NTB PMA Results
Date5-Jul-1719-Jul-17
TenorRate (%)Sale(N’bn)Rate (%)Sale(N’bn)
91 days13.5028.6913.4332.40
182 days17.5021.2517.4026.60
364 days18.60127.0618.55145.96
FGN Bond Auction Results – 12 July 2017
TenorRate (%)Sale (N’bn)
Jun-2116.24009.10
Mar-2716.250055.31
Apr-3716.251464.75

Money Market

The Money Market opened the month in negative territory on the back drop of OMO issuances and FX interventions by the CBN. However, market Liquidity improved over the course of the month due to inflows from OMO maturities, Bond coupon payments and FAAC disbursements . OBB and Overnight rates spiked to a high of 78.00% and 80.58% , reflecting the cash crunch in the market due to OMO and FX sales by the CBN at the start of month. Consistent liquidity injections during the course of the month moderated rates to sub 20.00% . Funding rates eventually closed the month at 5.00%. We expect the CBN to react to inflows of c.N725billion expected from OMO maturities and Bond coupon payments in the month of august via its OMO and FX auctions at it continues to maintain a tight monetary stance to curb inflationary pressures and maintain FX stability.

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FX Market

The Interbank FX market opened at N305.95/$ with a total amount of $821million injected into the market by the CBN. Rates remained stable over the course of the month and closed at N305.65. We expect rates to remain stable in the coming month as the CBN continues its interventions in the market. The Investors and Exporters FX window recorded a total turnover of $2.258bn, 25.00% higher than the turnover of $1.812bn recorded in the month of June. Rates opened at a low of N359.00/$, reached a high of N369.50 and eventually closed at N367.88. The market traded at an average rate of N365/$, N5.00 lower than the N370.00 average for the month of June. We expect rates in this segment to trend lower as the CBN continues to champion the call for rate convergence across all segments of the market. The Parallel Market traded within a range of N362.50 – N365.00 in the month of July , slightly below the average rate in the I &E window . The market succumbed to weak demand from speculators as the CBN continued its interventions in the retail segment of the market. We expect rates to decline marginally in the coming month.

Mkt SegmentTurnover ($bn)Month OpenMonth Close
Interbank0.821305.95305.65
BDC Window1.638362.00362.00
I&E Window2.258359.00367.88
Parallel marketN/A364.00363.00

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Eurobonds:

Bullish sentiments prevailed in the Eurobonds market in the month of June as both the FGN and most corporate Eurobonds recorded significant MoM yield declines. Yields on the 2021, 2022, 2023 and 2032 FGN Eurobonds declined MoM by 28bps, 30bps, 21bps and 20bps respectively. Yields on the 2018 bond however rose by 28bps The bullish sentiments could be largely attributed to the improvements in the macroeconomic outlook for the economy spurring foreign and domestic investors interests in the high yielding dollar denominated bonds.

Bullish sentiments also prevailed in the corporate Eurobonds space with most of the bonds experiencing significant MoM yield declines while only few experienced slight MoM yield appreciations as demand from domestic and foreign portfolio investors also trickled into the Corporate Eurobonds, especially on the Fidelity, First bank and recently issued UBA 2022 bond.

The following bonds experienced MoM yield declines: Fidelity 2018 (-53bps), FBN 2020 (-53bps), Access II 2021 (- 10bps), FBN 2021 (-53bps), Eco 2021 (-13bps), Access III 2021 (-2bps), and UBA (-44bps). The bonds with MoM yield appreciations were: GT 2018 (+24bps), Zenith 2019 (+7bps), Diamond 2019 (+17bps) and Zenith 2022 (+5bps). We expect the bullish trends to be sustained in the coming month, with increased demand expected on the Tier 1 names.

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Sources: FMDQ, CBN, NBS, Bloomberg, Rexel BDC, Zedcrest research