Bond Yields Drop on Expectation of Higher Inflation

14 Jan 2013

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By Obinna Chima

Yields on FGN bonds declined marginally on Friday due to the anticipation that the National Bureau of Statistics (NBS)will this week announce higher inflation figures for December 2012.

The National Bureau of Statistics (NBS) is expected to release inflation figures for December 2012 this week ahead of the Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN) scheduled to commence on January 21. Inflation for November 2012 stood at 12.3per cent, an increase from 11.7 per cent recorded in October 2012.

For instance, THISDAY research revealed that while the yield on the 7th FGN Bond 2015 Series 2, reduced to 11.57 per cent on Friday, from 11.95 per cent the preceding Friday, yield on the 9th FGN Bond 2017 Series 2, also dropped to11.06 per cent, from 11.25 per cent the preceding Friday. Similarly, just as yield on the 5th FGN Bond 2018 Series 2, dropped to 11.14 per cent, from 12.24per cent on the preceding Friday, yield on the 9th FGN Bond 2019 Series 3 also declined to 11.36 per cent, from 11.37.

Some financial market analysts had forecast a year-on-year increase in the December 2012 inflation rate expected to be released next week. The London-based Emerging Markets Strategist, Standard Bank Plc, Mr. Samir Gadio, also attributed the development to improved liquidity position of the market.

He pointed out that the inclusion of FGN bonds in the JP Morgan’s GBI-EM index in January 2013 as well as planned incorporation of FGN bonds into the Barclays EMLC index from March this year, suggested that Nigeria had become a debt market that simply cannot be ignored anymore among emerging- and frontier-market investors.

Gadio, who was responding to questions from THISDAY added: “Interestingly, Nigeria continues to offer the highest bond rates in the GBI-EM universe, even despite the sharp yield compression experienced since September. This layer of off shore support is likely to drive yields on FGN bonds lower, a trend already tangible in early 2013 as the long end is now in firm sub-12 per cent territory.

“In a related matter, the probable drop in inflation to single-digit levels in first quarter 2013, given the high base effects in the time series, and increasing expectations for moderate policy rate cuts will also push yields to new lows and generate further domestic bid from Pension Fund Administrators and financial institutions.

”He predicted that bond rates would likely break “the 10 per cent threshold in the short-term, adding that any intermittent sell-off would certainly represent a buying opportunity for now.

“Yet the risk is obviously that the market gets carried away and pushes real yields to significantly unappealing and negative levels from which an upward correction will then materialise when inflation starts to pick up later in 2013.”

NIBOR Movement
The Nigerian Interbank Offered Rates (NIBOR) climbed marginally to an average of 13.79 per cent on Friday, as against the 13.38 per cent attained the preceding Friday. This was attributed to outflow to the purchase of treasury bills. For instance, while the overnight tenor leapt to 12.62 per cent on Friday, from11.12 per cent the preceding Friday, the7-day tenor also climbed to 12.96 per cent on Friday, from 11.87 per cent the preceding Friday.

Also, while the 30-day tenor jumped to 13.62 per cent on Friday, from 13.37 per cent the preceding Friday, the 6-day tenor also stood at13.83 per cent. The CBN last week sold N30.153 billion of 91-day bills at a yield of 11.55 percent, N50.403billion of 182-day bills at 11.60 percent yield and N85.845 billion of 364-day bills at a yield of 11.79 per cent. The auction was oversubscribed to the tune of N360.2billion, higher than the N166.4 billion offered by the regulator.

Exchange Rate
The naira was relatively stable against the dollar across various segments of the forex market. At the interbank market, the naira closed at N156.43 to a dollar on Friday, representing a slight increase, compared to the N156.49 to a dollar it attained the preceding Friday. At the CBN’s regulated Wholesale Dutch Auction System (WDAS) which re-opened last week, the naira was stable at N155.77 to a dollar. The apex bank offered a total of $250 million to the dealers that participated in the auction, whereas only a total of $193 million was sold.

But the local currency slipped by 50 kobo at the parallel market to close at N160 to a dollar, compared to the N159.50 to a dollar it was the preceding Friday, according to data from the Financial Market Dealers Association.

CBN Banking Supervisory Role
The House of Representatives last week disclosed plans to set up an independent body that would be responsible for banking supervision in the country.

THISDAY learnt that the House was working on a legislation that could strip the CBN of oversight over the banking system and transfer it to an independent body that will be responsible for banking supervision. The proposed law, according to the lawmakers, would result in the withdrawal of the banking supervisory function of the central bank, leaving it to oversee monetary policies and currency management.

Chairman, House of Representatives Committee on Banking and Currency, Hon. Jones Onyereri, said in a phone conversation with THISDAY that the independent body might be named the “Financial Supervisory Committee”. Onyereri insisted that the move became necessary so as to make the CBN focus more on its mandate of price stability and monetary policy.

Agency Banking
The CBN last week disclosed that the draft framework for agency banking will be released next month. Deputy Governor, Operations, CBN, Mr. Tunde Lemo, explained that the delay in implementing the policy was because the apex bank had to integrate opinion of stakeholders in the framework. Lemo had said: “The document is being fine-tuned. We are now incorporating the stakeholders’ views in the final document and the framework will be launched within a month.

”CBN Governor, Mallam Sanusi Lamido Sanusi, had revealed that the banking sector regulator had been working on the number of agents to be engaged, the use of the Nigerian Postal Service, the relationship between the banks and telecommunication firms for agency banking. The CBN recently said the main objective of the proposed introduction of the three-tiered Know-Your Customer (KYC) system was to encourage agency banking as well as to promote financial inclusion in the economy.

Restructuring of Assets
Deposit Money Banks (DMBs) were last week advised to restructure their assets portfolio this year so as to continue to post strong earnings to justify their huge capital base. The FSDH Securities Limited, which gave this advice, argued that the declining yields on fixed income securities would no longer make investments in treasury bills and bonds as profitable as they were in 2012, “as margins continue to thin out.”

The firm added: “Banks must therefore create more risk assets in 2013. The banking sector robust balance sheet, after the house cleaning exercises by the Asset Management Corporation of Nigeria (AMCON), has strengthened the capacity of banks to increase their risk assets in the near-to-medium term."

Pension Managers’ Investment
Pension Fund Administrators (PFAs) in the country may have invested over N1.8 trillion in Federal Government securities. The National Pension Commission (PenCom) had said that the figure represented over 61 per cent of pension assets in the country under PFAs' management. The commission said over N370 billion or 13 per cent of pension assets in the country was invested in money market instruments, while N335 billion or 12 per cent was invested in stocks on the floor of the Nigerian Stock Exchange (NSE) while pension assets invested in real estate peaked atN167.89 billion or 6 per cent of the total fund.

Tags: Nigeria, Featured, Business, CBN

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