Bond Market Bearish as Investors Await Inflation Data



By Obinna Chima

The local bond market was bearish last week as yields rose across tenors on all trading sessions.
Precisely, average yield on benchmark bonds closed at 15.2 per cent on Friday, up 10 basis points (bps) week-on-week.
The week started on a bearish note, largely driven by two bps increase in medium- to long-term bonds yield, and persisted through the week as sentiment remained negative.
The bearish run was attributed to investors’ expectation for October Inflation report (scheduled for release this week) and traders preference for dealing at the shorter end of the curve (T-bills and OMO) which witnessed increased activity last week with several primary market issuances.
The Consumer Price Index (CPI), which measures inflation, had increased to 17.9 per cent in September from 17.6 per cent it stood the previous month.

The National Bureau of Statistics (NBS), which released the CPI figures, had noted that the 0.24 per cent rise in headline index was attributed mainly to increases in the sub food index as well as energy prices. According to NBS, for the September CPI, increases were recorded in all the divisions which contribute to inflation.
“We expect activities to remain soft in the bonds market in sessions ahead but yields would likely remain at current level,” analysts at Afrinvest West Africa Limited predicted in a report at the weekend.
However, sentiment on Africa’s Sovereign Eurobonds stayed bearish last week as yields rose on a range of instruments within our coverage. The major driver of the bearish sentiment appears to be interest rate outlook in the advanced economies, particularly market consensus forecast of a hike in US Fed Fund rate by December 2016 following strong economic data, according to Afrinvest.
Yields on all Gabon, Côte d’Ivoire, Kenya, Zambia and Senegal Sovereign Eurobonds rose W-o-W. Yield on Nigeria’s 5-Year Note maturing in 2018 dropped three bps week-on-week to 4.6 per cent but rose on the 2013 instrument by eight bps to seven per cent.
But longer-dated South African Sovereign bonds surprisingly fell, despite the political turmoil gripping the country, but shorter term yields for instruments maturing between 2017 and 2020 rose.

“With the US Fed now expected to hike rate in December – save a Republican victory at the US Presidential Poll– issuers in emerging and developing countries would increasingly find dollar liquidity more expensive and we expect sentiment to remain bearish on outstanding bonds.
“Performance of Nigerian Corporate Eurobonds remained mixed this week as investors took profit in the ACCESS 2017 bond (YTM up 47bps week-on-week to 5.3%), likewise the ZENITH 2019 (YTM up 2bps week-on-week to 7.1%).
“Renewed buying interest in FIDELITY 2018 and the 9.3% ACCESS 2021 bonds saw yields decline 54bps and 20bps week-on-week to 16.3% and 10.8% respectively. GUARANTY 2018 Eurobond has returned the highest YTD at 8.4% while the DIAMOND 2019 has the highest YTD loss at 16.6%,” it added.
Forex Market

The naira weakened against the greenback on the interbank FX market but closed flat on week-on-week at the parallel segment.
At the Interbank market, the naira weakened to N308.81/$ at the start of the week (from N304.5 the preceding Friday) before making a comeback on Tuesday, appreciating to N304.75/$ and remained stable till Friday when it dropped to N328/$, implying a 7.1 per cent week-on-week depreciation.
The parallel market was relatively stable, trading within a band of N465/$1– N470.00/$1. The naira appreciated N5.00 on Tuesday to N465.0/US$1.00 but weakened on Wednesday to settle at N470.0/US$1.00.
The CBN intervened in the interbank market with daily spot sales of $1.5 million and major forwards sales at the Special Secondary Market Intervention Retail Sales (SMIS) window. According to the CBN, manufacturers, airlines and agro-allied industries were given preference at the forward retail sales to be settled in 60 and 90 days.
Interbank Naira Market

Money market rates rose last week as liquidity remained tight due to several primary market issuances by the CBN and debit of banks for the $500 million FX forwards sale.
The CBN conducted two open market operations (OMO) auctions in addition to a scheduled treasury bills auction mid-week to mop-up liquidity and guide interbank rates to target level.
Consequently, the open buy back (OBB) and overnight rates rose to 13 per cent  and 13.5 per cent last Friday, up 3.4 percentage points apiece week-on-week (from 9.7% and 10.3% recorded the preceding Friday).
The OBB and overnight rates inched 5.8 and 6.5 percentage points higher to 15.5% and 16.8% respectively at the start of the week due to expectation of a debit for the $500 million FX forwards sale.
But rates dropped slightly by an average of 100bps on Tuesday as the CBN deferred debiting banks for the FX auction and despite a N50.8 billion OMO auction for the 198-day and 345-day tenors issued at stop rates of 18 per cent and 18.5 per cent respectively.
Nonetheless, the Afrinvest report showed that sentiments in the treasury bills market was largely bullish as treasury bills rate (on average) trended downwards on four of five sessions.
“In the week ahead, we expect the Central Bank to continue mopping up liquidity through OMO auctions and thus expect money market rates to revolve around liquidity dynamics with a floor of 10.0%. October Inflation report should also drive sentiment in the T-bills market,” the report added.