In our 2021 outlook report titled ‘A Shot at Recovery’, we noted that our overall outlook for the yield environment in 2021 was biased towards an upward reversal from the historically low levels of 2020.
We cited increased deficit funding pressure, downward pressure on liquidity levels and a likely reversal to hawkish monetary policy in the latter part of the year as factors likely to guide yields higher in 2021, coupled with the introduction of “Special Bills” by the apex bank without leaving out the market’s desire for better rates.
In line with our outlook, albeit earlier than anticipated, the predominant theme in the fixed income market so far this year has been one of yield expansion. The average yield on FGN bonds has surged significantly (up by 325bps from 6.12% on 31-Dec 2020 to 9.37% as of Friday, 5-Mar 2021), in what has been a rapid retracement towards pre-pandemic levels.
On one hand, the CBN has shown a clear intent to make yields more attractive by giving in to investor demand for higher yields at the NTB primary market and hiking OMO rates to entice foreign investors, despite its decision to keep the monetary policy rate unchanged at the Monetary Policy Committee meeting held in late January.
On the other hand, investors have incessantly demanded higher rates amid the galloping inflation rate, which renders fixed income yields unattractive even at current levels.
Looking forward, we expect the bearish steepening of the yield curve (fast-paced increases in the yield on medium to long-dated bonds relative to short-term bills) to persist. Again, thinner liquidity levels going into Q2-2021, the FGN’s need for deficit financing, and a rising pressure on the CBN to tighten even more, amid currency market divergence and galloping inflation, are factors that support a higher yield environment.
