Bond Yields Rise as Investors Await MPC Decision



By Obinna Chima

Ahead of the monetary policy committee (MPC) meeting expected to commence today, sovereign bond yields have been on the rise as investors expect a possible upward re-pricing of the benchmark monetary policy rate (MPR) on the back of the rising inflationary pressures.

In line with analysts’ forecast, the headline inflation rate for April 2016 announced last week spiked to a record 13.7 per cent, the highest level since August 2010. The latest inflation figure was a continuation of the trend of price spiralling that has become a source of concern to policy makers and the government.

Headline inflation has spiked by 2.8 per cent since February after a gradual but consistent climb in the consumer price index (CPI) since 2015.

The MPC had guided the market on the need to maintain a positive interest rate in its March, 2016 meeting when it increased MPR to 12 per cent from 11 per cent in order to give a spread on inflation rate which was at 11.4 per cent in February.

According to a report by Afrinvest West Africa Limited, the expectation of MPR at possibly 14 per cent or 15 per cent has dictated bond yields dynamics in the last two weeks.

Average bond yields in the week settled at 13.4 per cent with a steady rise in all trading days of the week.

“We noticed increased buying appetite for longer dated bonds with term to maturity of three years and above as bond yields (excluding Aug 2016, April 2017 and Jul 2017) currently converge around 14 per cent.

“The bearish mood in the market led to further dip in prices as most instruments are currently trading at discount, presenting a cautious opportunity in the horizon, post the next MPC meeting. Consequently, the sovereign bond yield curve shifted upward week-on-week with the normality of the curve noticed at the short end of the curve while the medium to long term end shows a near flatness with the yields converging at 14.2 per cent,” the report added.

However, analysts stated that the major determinant of yields movement will be premised on the decision of the MPC about MPR.

“Whilst we somewhat hold a view that interest rate does not necessarily have to go up to correct the rising inflation, we suspect that the MPC may stick to its real interest rate target to increase the rate. Hence, bond yields will likely respond with a price correction as the current levels already factored in this expectation,” Afrinvest added.

Also, the Financial Derivatives Company Limited (FDC) stated that the high inflationary environment would have various impacts on policies, the markets and various economic agents.

To this end, the FDC argued that the MPC was expected to seriously consider the consequence of high inflation on investor returns, adding that a tighter monetary environment (hiking interest rates) could result in investors shifting to the fixed income market due to attractive interest rates.  In addition, the Nigerian Interbank Offered Rates (NIBOR) and treasury bills rates would be expected to increase.

“The average opening position of banks in April of N423.58 billion, confirms a situation of excess liquidity in the system. That in addition to petrol prices now at N145, a weak currency and inflationary pressures intensifying, the Nigerian labour union is agitating for an increase in minimum wage to N56,000.

“This is a 211 per cent increase from the N18,000 minimum wage, which took effect in March 2011. Meanwhile, the cumulative average inflation rate between 2011 and 2015 is 48.6 per cent. An increase in minimum wage will increase money supply, stoking inflationary pressures,” the FDC added.

GDP Growth Turns Negative

Nigeria’s headline real Gross Domestic Product (GDP) growth turned negative in the first quarter of 2016 coming in at -0.4 per cent year-on-year – the first negative quarterly GDP number since newly-rebased data, with a 2010 base, were published. The oil sector contracted 1.9 per cent year-on-year, after declining by 8.3 per cent year-on-year, in fourth quarter 2015.

 More worryingly, manufacturing output shrunk by seven per cent year-on-year. The poor manufacturing data meant that the non-oil sector saw negative growth (of -0.2%) for first time since this data series began being published. The rate of growth was prevented from falling more deeply into negative territory by the agriculture sector, which, making up around 25 per cent of the economy, grew by 3.1 per cent year-on-year. Services output growth also remained in positive territory, but only just at 0.8 per cent year-on-year.


Money Market Review

Financial system liquidity last week opened at N118.7 billion, lower than the previous week’s liquidity level of N183.6 billion. Liquidity levels worsened throughout the week until Friday when it rose to N141.7 billion amidst constraints in the system as inflationary pressures mount.

The open buy back (OBB) and overnight rates settled at 8.5 per cent and 8.9 per cent on Friday.

This week, it is expected that money market rates would be determined by system liquidity dynamics.

However, the CBN auctioned a total of N110.9 billion in 91-day, 184-day and 364-day instruments at marginal rates of 8.1 per cent, 9.2 per cent and 12.5 per cent. The result of the auction showed investor sentiments still favour short dated tenor instruments than the longer ones as the offered amount was fully allotted as against the Debt Management Office’s auction the preceding week which showed only 50 per cent allotment rate on the average. Average treasury bills rate settled at 9.7 per cent on Friday as against 8.5 per cent the preceding week. The decision of the MPC regarding MPR will likely determine the direction of rates in the coming week.

Forex Market

Contrary to speculations of a likely devaluation of the local unit last week, the central bank held its weekly intervention window at N197/$1 and the interbank market remained at N199.10/US$1.00 for more than a year now.

Speculations of a likely adjustment arose following the announcement that fuel marketers are to source forex from autonomous sources at an estimated exchange rate of N285/$1. At the parallel market last week, the naira appreciated from N360/$1 the preceding week to N343 to a dollar on Friday.

“In our view, the market may have fully digested the news flow on the liberalisation of downstream petroleum sector that fixed PPPRA exchange rate at N285/$1. We expect the parallel market rate movement in the coming week to be determined by the decision of the MPC,” Afrinvest added.

Higher Inflation

The Consumer Price Index (CPI) ,which measures inflation rose further to 13.7 per cent in April compared to 12.8 per cent in March and 11.4 per cent in February, the National Bureau of Statistics (NBS) stated last week. It blamed the 0.9 per cent rise in the headline index on the lingering structural constraints, which had continued to manifest in electricity rates and kerosene prices.

The NBS said the impact of higher prices in petrol and vehicle spare parts contributed significantly to the core sub-index in April.

“These items as well as other imported items continued to have ripple effects across many divisions that contribute to the core. The index increased by 13.4 per cent in March, roughly 1.2 per cent points from rates recorded in March,” it stated.

According to the CPI figures for April, higher rate of increase relative to March was reflected in faster increases across all divisions which contributed to the index with the exception of restaurants, and hotels division which increased, though at a slower pace for the third consecutive month.