Investors Find Solace in Fixed Income Market

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Obinna Chima

Following the bearish sentiment that has persisted in the equities market, investors’ interest has turned towards the fixed income market.
But, buying interest in the fixed income securities market has remained on shorter tenor treasury bills instruments given the current attractive yield environment. As a result of this, activities in the longer-dated bond market have remained relatively soft and this persisted last week, according to a report by Afrinvest West Africa Limited.

The Nigerian Stock Exchange (NSE) All-share index and market capitalisation depreciated by 0.72 per cent to close last week at 27,450.91 and N9.428 trillion respectively. Similarly, four other Indices finished lower during the week.
The performance of the stock market was hampered by the ban imposed on nine commercial banks from operating in the forex market by the Central Bank of Nigeria (CBN).

The CBN last Tuesday barred nine banks from participating in the forex market for not remitting a total of $2.334 billion Nigerian National Petroleum Corporation (NNPC)/Nigerian Liquefied Natural Gas (NLNG) Company dollar deposits to the federal government’s Treasury Single Account (TSA). The affected banks were: the United Bank for Africa (UBA) Plc, First Bank of Nigeria (FBN) Ltd, Diamond Bank Plc, Sterling Bank Plc, Skye Bank Plc, Fidelity Bank Plc, Keystone Bank, First City Monument Bank (FCMB) Ltd and Heritage Bank Limited.

But UBA has been re-admitted into the forex market after complying with the directive.
On the other hand, a total of 1,650 units of Federal Government Bonds valued at N1.690 million were traded in three deals last week, according to a report by the NSE.

Compared to the preceding Friday, average yields across benchmark instruments declined 0.9 per cent to 15.1 per cent last Monday. Also, on Tuesday, as trading activity remained marginal, average yields across benchmark instruments slid 0.1 per cent to settle at 15 per cent. On Wednesday however, marginal sell pressure drove yields two basis points higher.

Yields on bonds closed flattish last Thursday, but eventually rose to 15.1 per cent on Friday, lower by 0.9 per cent week-on-week, broadly due to the bullish sentiment last Monday.
“We expect investors to trade cautiously in opening trades this week ahead of July 2016 inflation data release,” analysts at Afrinvest stated.

Similarly, the Sub-Saharan sovereign Eurobond space experienced mixed performance during the week as yields declined on all the Ghanaian Eurobonds (Ghana 2023, 2026 and 2017 down 0.2% 0.2% and one basis point respectively).
Yields on the Zambian and Senegal sovereign Eurobonds (Zambia 2024, 2022, Senegal 2024 and 2021 down 0.2 per cent, 0.2 per cent, 0.1 per cent and 0.1 per cent respectively) also declined on a week-on-week basis.

On the flip side, yields rose on South African Eurobonds, by an average of 0.3 per cent week-on-week while the Nigerian 2023 Eurobond both rose 0.1 per cent week-on-week.
In the Nigerian corporate Eurobond space, sentiment was bearish performance during the week as yields rose across all instruments save for the Fidelity 2018 Eurobond. This may be linked to profit taking and speculations in the global market about probable hike in Fed Fund rate which spooked sentiment for emerging-market assets.

Forex Market
The naira opened the week stronger at the interbank market, as spot rates strengthened to N308.73/$1 last Monday, from N316.55/$1 the preceding Friday and further appreciated to N305.18/$1 last Tuesday.
The naira however weakened to N316.84/$ on Thursday before eventually settling at N314.95/$1 on Friday following the decision of the CBN to ban nine banks from the interbank market.

However, parallel market rates tumbled 3.6 per cent week-on-week as the greenback exchanged for the naira at N412/$1 last Friday relative to N397/$1 the preceding Friday.
“Overall performance of the domestic currency was pressured by volatility in the currency market which was triggered by the sanction imposed on nine banks by the apex bank,” analysts at Afrinvest stated.

In the futures market, the AUG 24 2016 contract with a notional value of $152.5million at $/N310, matured and was settled on the FMDQ platform on the said maturity date. This was replaced by the CBN with a new 12-month contract (AUG 16 2017), with value of open contract offered at US$41 billion at N244/US$1.00. In addition, new rates were published for the existing one-month to 11-month contracts.

Analysts anticipate that the foreign exchange market will continue to be pressured in the interim, especially at the parallel market, as liquidity in the official market remains a concern.
The CBN on Friday said it observed that some banks are operating accounts either as companies or companies masking themselves as individuals for the purpose of illegally receiving money transfer flows into those accounts for onward disbursements to recipients in Nigeria.

To curb this international fund transfer, the CBN in a circular titled: “Illegal International Money Remittances Through the Banking System,” dated August 25, 2016, and signed by its Acting Director, Trade and Exchange Department, Mr. W.D. Gotring, directed banks to identify and freeze such accounts receiving illicit flows with immediate effects. The banks were also directed to submit the mandate and account details of these accounts held in naira or foreign currency to it for onward reporting to the security agencies.

“The CBN therefore reiterates that deposit money banks have the absolute responsibility to conduct Know Your Customers’ Business (KYCB) checks on all their customers to ensure that they do not transact in illegal/illicit flows,” it added.

Money Market
System liquidity opened with a balance of N22.3billion last Monday. Thus, Open Buy Back (OBB) and overnight rates settled at 19 per cent and 21.8 per cent respectively on Monday. Rates declined on Tuesday as OBB fell to 17.5 per cent while overnight rate slid to 18.6 per cent following an improvement in liquidity levels which settled at about N25 billion.

The downtrend in rates lingered into Wednesday, with no major inflow or outflow from the system as OBB and overnight trended lower to 17 per cent and 18.1 per cent.
However on Thursday rates rose, though at tight band, to settle at 16.3 per cent (OBB) and 17.9 per cent for overnight. Consequently, money market rates slid 4.8 per cent (OBB) and 6.7 per cent for overnight week-on-week respectively.

Across the treasury bills term structure, the nine month and 12 month tenors remained the most attractive with rates closing respectively at 17.8 per cent and 17.6 per cent on Friday.
“We expect rates to trend in line with liquidity dynamics in the coming week as interest in treasury bills and OMO instruments currently trading at attractive rates strengthens,” Afrinvest analysts added.

The CBN plans to offer N212.85 billion treasury bills maturing between 91-days and 1-year this week. The central bank said it will sell N45.85 billion worth of the 91-day bills, N62 billion of the 182-day paper and N105 billion of the 1-year debt. Payment for the purchase will be effected on Thursday.