Investors May Dump FGN Securities for Corporate Bonds

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Obinna Chima

Analysts at FSDH Merchant Bank Limited have predicted that investors would take profit on some of their investments in FGN Eurobonds and move their investments to some of the corporate Eurobonds with higher yields.
The firm therefore urged investors to take advantage of current yields on one-year treasury bills.

It noted in its latest monthly economic and financial markets outlook titled: ‘Growth Prospect Improves, But Uncertainties Remain,’ obtained on Monday that some of the corporate bond trading in Nigeria also have attractive yields which investors can take position in, stating that such an investment strategy would create liquidity in the Nigerian corporate bond market.

It also put the total inflow into the money market in March at N1.85 trillion.
Furthermore, it estimated that a total outflow of about N594billion from the various sources such as government securities and statutory withdrawals would be recorded in the market, leading to a net inflow of about N1.25 trillion.

The report however expects the market
to remain relatively liquid in April, which may necessitate the issuance of Open Market Operations (OMO) to mop-up the liquidity in the system.
The report also stated that yields on the NTBs may drop further from the current levels and that yields on the FGN Bonds may gradually increase from the current levels as the FGN starts to increase its borrowings to fund the 2018 budget which is closed to its approval.

The report also showed that the equity market recorded the second month-on-month decline in 2018 as it depreciated in March, compared with
the closing position in February.
However, it anticipated that the stock market would appreciate in the second quarter of of 2018 based on historical performance.

The FSDH research identified major uncertainties in the economy as: delay in the passage of the 2018 Budget; possibility of capital flight as a result of monetary policy normalisation in the advanced
countries; possibility of a drop in the crude oil price at the international market; and possible increase in the food prices as a result of the rising unrest in the food producing states in Nigeria, pointing that they may have unfavourable impacts on inflation rate.

It also forecast further decline on inflation rate to 13.47 per cent in March mainly on account of base effect of previous year.

“We expect inflation rate to drop to single digit in July 2018, provided there is no adjustment to the price of Premium Motor Spirit (PMS), electricity tariff, and government resolve to stop the rising crises in some parts of the country quickly.

“The declining inflation rate may lead to a further drop in the yields on fixed income securities, particularly at the short-end of the yield curve.”
It however, noted that the current strategies of the Debt Management Office (DMO) to reduce the interest expense on the debt of the Federal

Government of Nigeria (FGN) was working.
The report further said: “FSDH Research had issued a note to justify the need for monetary policy easing to stimulate growth in the economy.
“Although the MPC desires more credit flow to the economy to stimulate growth, it did not give clear indications of how it would achieve this.

“FSDH Research believes the CBN may soon deploy measures that will inject additional funds to the financial system that will enable bank increase credit creation in the economy to stimulate growth.”
It added: “The rising foreign capital inflows into Nigeria; favourable crude oil price; and increased oil production have led to significant accretion to the external reserves. The positive outlook for the Nigerian economy also adds an impetus for further accretion to the external reserves.
“The 30-day moving average external reserves increased by 8.76 per cent to US$46.21 billion as at end-March 2018, from US$42.49 billion at end-February.

“The inflows through the Importers and Exporters Foreign Exchange Window (I&E Window) between April 2017 and 05 April, 2018 stood at US$41.97 billion. The highest monthly amount since inception was recorded in January 2018 at US$6.04bn while the amount record in March 2018 at US$5.15 billion was higher than the highest amount recorded in 2017 at US$4.53 billion. The current external reserves position continues to provide short-term stability for the value of the naira,” it added.