Sell Pressure Persists in Bond Market

MARKET INDICATOR 

By Obinna Chima

The FGN bond market witnessed sustained sell pressure last week amid strain in financial system liquidity, resulting in depressed bond prices across all maturities.

As a result of this, the 20-year, 10.00% FGN JUL 2030 debt, lost N2.32 (yield increased to 15.29%); while the 10-year,16.39% FGN JAN 2022 paper shed N1.97 (yield rose to 14.92%). Also, the 7-year, 16.00% FGN JUN 2019 fell by N2.58 (yield increased to 15.35%); while 5-year, 15.10% FGN APR 2017 paper shed N1.18 (yield rose to 15.59%).

According to a report by Cowry Asset Management Limited, at the London Stock Exchange, traded FGN Eurobonds also depreciated on profit taking activity as the 10-year, 6.75% FGN JAN 2021 paper; the 5-year, 5.13% JUL 12,2018 bond; and the 10-year, 6.38% JUL 12, 2023 bond lost $0.75 (yield rose to 6.16%), $0.07 (yield increased to 4.35%) and $0.26 (yield climbed to 6.45%) respectively.

“This week, we anticipate a break in the bear movement at the over-the-counter (OTC) market, resulting in moderation in bond yields,” analysts at Cowry Asset projected.

But analysts at Afrinvest West Africa Limited stated that the performance of the market this week is expected to be driven by the outcome of the monetary policy committee (MPC) meeting scheduled for today and tomorrow.

Interbank Naira Market

Rates in the interbank naira market remained in the double digit band and trended higher on all days of the week due to tighter system liquidity.

A breakdown of market activities last week showed that on Monday, aggregate system liquidity opened lower at about N188.2 billion from N269.8 billion the preceding Friday, thus the open buy back (OBB) and overnight rates settled at 17 per cent and 19 per cent respectively.

With no major inflow or outflow from the system last Tuesday the OBB rose one per cent  to settle at 18 per cent while the O/N rate marginally eased eight basis points to 18.9 per cent. On Thursday, the over allocation at the treasury bills auction offset  the expected impact of the N131.5 billion open market operation (OMO) maturity thereby reducing liquidity levels and driving OBB and overnight rates to 1.4 per cent  and 1.3 per cent northwards to 19.4 per cent and 21.2 per cent respectively.

But, the report by Afrinvest showed that liquidity levels improved on Friday, thus rates eased to 16.6 per cent and 17.6 per cent. As a result, OBB and overnight rates declined week-on-week, down 4.2 per cent and 5.2 per cent to 16.6 per cent and 17.6 per cent respectively.

“Trading in the treasury bills market opened the week on a bearish note on account of lower liquidity in the system as well as investors expectation of higher stop rates at the treasury bill auction on Wednesday. On Monday average treasury bills rates settled at 13.5 per cent sustaining the trend on Tuesday as average rates rose 0.5 per cent.

“On Wednesday, there was a T-bills maturity of N36.9 billion (91 days), N39.2 billion (182 days) and N52 billion (364 days) however the same amount was scheduled to be rolled over and all instruments were oversubscribed at the auction but the 364 days instrument was over allotted at N129 billion. Consequently, average rates at treasury bills market rose to 14.7 per cent on Thursday,” it added.

In the coming week, there is an OMO maturity worth N50 billion  is expected to hit the system on Wednesday, however, analysts expect money market rates to remain within the double digit levels amid expectation surrounding the MPC meeting scheduled for this week.

Forex Market

The volatility which began in the market the preceding week persisted last week as the local unit weakened on all but one trading day of the week. The depreciation of the currency that was recorded last week was tightly linked to the cessation of FX intervention by the CBN.

At the interbank market, the naira weakened on all trading days of the week save for Wednesday. On Monday, the domestic currency traded at N292.15/$1 On Tuesday, the naira further depreciated to N294.57/ US$1.00 but appreciated mildly to N294.23/$1 on Wednesday. On Thursday, there was another massive depreciation at the spot market as the naira fell to N310.43/$1.00 before strengthening to N307.98/$1 on Friday. The CBN did not intervene in the market throughout the week as paltry transactions worth $780,000, $300,000 and $380,000 were done on Monday, Tuesday and Wednesday respectively while $7.10 million worth of trades were done on Thursday.

Also, parallel market rate waned throughout the week, down by 3.6 per cent week-on-week from N365/$1 the preceding Friday to N378/$1 by the end of the week.

The naira equally depreciated at the Bureaux De Change market to N365/$1 as unmet dollar demand continued to spill into the alternative market segments.

This week, analysts at Cowry Asset Management anticipate stability at the foreign exchange market following the settlement of the 1-month (July 2016) tenor futures contract worth $697 million  entered by the CBN on Monday, 27 June 2016 at the rate of N279/$1.

In the week ahead, the central bank may also out interventions and clear up some of the pent up FX demands to soften the pressured rates at the interbank market amidst MPC expectation.

Economy

The Finance Minister, Mrs. Kemi Adeosun last week disclosed that the Nigerian economy is in recession. Adeosun, who made this disclosure while briefing the Senate on the state of the nation’s economy, was however emphatic that the recession was technical and would be short-lived.

Buttressing the point, her counterpart in the Ministry of Budget and National Planning, Senator Udoma Udo Udoma, said the economy was “technically in recession”, adding however that it would start to grow by the end of the third quarter of 2016.

The recession, notwithstanding, Adeosun was confident that Nigeria would come out stronger in view of the policies and programmes that the government had put in place to address the downturn.

She also confirmed that fuel subsidies had been totally eliminated, adding that the petroleum products in the country were now market-driven, as the subsidy removal by the government had paved the way for healthy competition among oil marketers.

“Is Nigeria in recession? Technically, if you go into two quarters of negative growth. Technically, we are in recession, but I don’t think we should dwell on definitions. I think we should really dwell on where we are going.

“I think if we are in a recession, what I will like to say is we are going to come out of it and it will be a very short one because the policies that we have will ensure that we don’t go below where we need to go and I think with what we are doing, we will begin to turn the corner by the third quarter.

“I can confirm there is no more subsidy. It is a market-driven price and indeed, one of the good things that we are now seeing is that prices have actually been coming down.

“There is now competition between filling stations for market share which is a good thing, which means overtime, the market will continue to correct itself,” she said.