August 19, 2019

Offshore investors to sustain dumping of fixed income assets

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By Babajide Komolafe

THE increasing selloff (dumping) of fixed income assets (bonds and treasury bills) by offshore investors is expected to persist this week, even as the Debt Management Office, DMO, offers N145 billion worth of FGN bonds.

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Driven by weakening global economic conditions and fears of recession in some developed and emerging economies, as well as anxiety over the direction of crude oil prices, and implication for the Nigerian economy especially the nation’s external reserves, offshore investors have been exiting the nation’s fixed income market selling their treasury bills and FGN bond holdings.

This trend, which also triggered increased dollar demand in the Investors and Exporters (I&E) window, persisted  last week, causing bond prices to fall for the second consecutive week, with corresponding rise in yields, in the Over-the-counter (OTC) segment.

Consequently, five-year, 14.50 per cent FGN JUL 2021 bond lost N1.58, while the yield rose to 14.16 percent from 13.21 percent the previous week. Similarly, the 10-year, 16.29 per cent FGN MAR 2027 debt lost N0.21 while the yield rose to 14.12 percent from14.08 percent. The 20-year, 16.25 per cent FGN APR 2037 instrument also lost N0.82 while the yield rose to 4.46 percent from 14.35 percent.

This trend, according to analysts at Zedcrest Capital Limited, is expected to persist in the near time. They said: “The FGN Bond market resumed from the break on a firmly bearish note, as market players reacted to the increasing selloffs by offshore investors in the Treasury Bills market. Selloffs within the market have been largely driven by weakening global economic fundamentals and recessionary fears, given the current inversion of the US and UK Treasury yield curves. We expect these risks off sentiments to continue to impact on investors’ appetite for FGN Bonds in the near term.”

Analysts at Vetiva Capital Management Limited also stated: “Evidenced by the continued advances in yields in both the T-bills and bond markets, investors remain bearish on the Nigerian economy. In addition, volatile energy prices will increasingly weigh on investors’ sentiment with regards to the federal government’s ability to generate sufficient fiscal revenues. As such, we foresee a mixed session with a bearish tilt at the start of next week.”

DMO to offer N145bn bond

Meanwhile the DMO will this week conduct its monthly bond auction by offering N145 billion worth of FGN Bond. The auction  comprise  N40 billion worth of 5-year bonds, N50 billion worth of 10-year bonds and N55 billion worth of 30-year bonds.

Analysts at Lagos based Cowry Asset Management Limited projected that the outcome of the auction will be influenced by investors’ quest for yields higher than the inflation rate of 11.08 percent. “We expect the bonds to be issued at higher stop rates as investors’ demand for positive real returns on fixed income assets intensify amid declining crude oil prices,” they said.

This expectation follows results of the treasury bills auctions conducted by the CBN last week where the apex bank bowed to investors demand for higher rates, by raising the stop rates on the 182-Days and the 364-Days bills  offered in the primary market to 11.35 percent and 12 percent from 10.60 percent and 11.18 percent respectively from the previous auction.

Also due to strong appetite for higher yields, investors shunned the short dated TBs offered by the CBN in the secondary market auction conducted on Thursday.

As a result, the 20 billion worth of 84-Days OMO bills offered by the CBN recorded N5.9 billion subscription, while the N30 billion worth of 175-Days OMO bills on offer recorded subscription of N3.7 billion indicating under-subscription of  70 percent and 87 percent respectively for the two instruments. However, the N100 billion worth of 364-Days bills  recorded over subscription of 6.3 percent as total subscription stood at N106.3 billion.

External reserve drops

On the foreign exchange scene, the nation’s external reserve fell by $478 million in the first two weeks of August, thus maintaining the    downward trend, which commenced in July.

Data from the CBN showed that the external reserve fell to $44.425 billion on August 15th, from $44.903 billion on July 31st.

Driven by sharp decline in dollar supply from offshore investors as well as increased dollar sales by the CBN to meet increased demand by offshore investors exiting the nation’s fixed income, the reserves have been on a downward trend since July 5thwhen it peaked at $45.149 billion, following six months steady rise which commenced on February 28th, 2019.

Naira stable

However, Naira was relatively stable in the I&E window and in the parallel market last week. In the I&E window, the naira appreciated marginally by two kobo last week, the first time since July, as the indicative exchange rate for the window fell slightly to N363.42 per dollar last week from N363.44 per dollar the previous week.

But the naira depreciated by 10 kobo in the parallel market as the exchange rate for the market rose to N358.3 per dollar last week from N358.2 per dollar the previous week.