Bearish Sentiment Persists in Bond Market

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By Obinna Chima

Bearish sentiments continued in the bond market last week.

Consequently, average yield pegged at 14.9 per cent, representing an increase of 11 basis points week-on-week.

The sentiment has persisted over the past few weeks, since the hike in yields in the treasury bills primary market auction (PMA) last month.

The hike in yields on 29th August, was said to have signalled that market yields were on the rise, in line with expectations. Consequently, the number and value of deals recorded on the FMDQ OTC declined by 5.1 per cent and 1.5 per cent week-on-week, to N844 billion and N409.9 billion respectively.
Given the expectation that yields would trend upwards in the fourth quarter of 2018 as the Central Bank of Nigeria (CBN) seeks to maintain price stability in the face of heightening risks (primarily political and policy), analysts at Afrinvest Securities Limited, anticipated in a report at the weekend, that trading activities would remain focused on the shorter end of the yield curve consequently exerting upward pressure on yields in the coming weeks.

Also, this was expected to impact participation (bid volumes) at the primary market bond auction to be held on the 26th of September for the benchmark 5-year (12.75% FGN APR 2023: Re-opening), benchmark 7-year (13.53% FGN MAR 2025: Re-opening) and benchmark 10-year (13.98% FGN FEB 2028: Re-opening).
In the sub-saharan Africa (SSA) sovereign eurobonds market, the volatility in emerging markets continued to reflect in trading on SSA Eurobonds, as yields continued to rise, advancing by five basis points across all instruments (Nigeria sovereigns up eight basis points week-on-week).

Also, Afrinvest stated, “While the economic constraints in Turkey and Argentina persist, we expect appetite for SSA sovereigns to remain tempered.
“In our opinion, while the contagion effect of emerging and frontier market routs has resulted in a moderate slowdown of portfolio investments into Nigeria in first half of 2018, we do not expect these to have substantial impacts on Nigeria’s broader macroeconomy given the relative stability in external economics (particularly steady and positive outlook in oil market) and the commitment of the Central Bank of Nigeria (CBN) to achieve a stable foreign exchange market. “Hence, the Nigerian sovereign Eurobonds provide a good opportunity to take advantage of attractive prices, with the opportunity for capital appreciation as market dynamics normalise.”
Conversely, the Nigerian corporate Eurobonds market has witnessed good levels of buying activities, which have resulted in average yield declining by five basis points week-on-week, to 7.5 per cent, with most instruments recording declines in yields.

This was adduced to the relatively higher yields on the assets over the sovereign.

As the spread narrows, analysts anticipated this to temper.

Interbank Money Market

Given the central bank’s commitment to sustain the stability of financial system and keep the foreign exchange market steady against the backdrop of fears of capital reversals, the overall system liquidity, in line with recent trend, remained strong.

According to Afrinvest, financial system liquidity which closed the prior week at N1.2 trillion,  opened last Monday at N422.2 billion.

However, an improvement to N794.9 billion was recorded last Tuesday. The amount which resulted from FAAC inflow to states and LGAs (estimated at N445 billion excluding the FGN’s share of N269.8 billion), forced the CBN to float OMO auctions totalling N600 billion of 77-day and 198-day instruments.

Appetite for the instruments was weak as the CBN only successfully raised a total of N171.3 billion at stop rates of 11.1 per cent (77-day instrument) and 12.2 per cent (198-day instrument).

By Thursday, OMO maturities of N294.5 billion also hit the system to sum opening financial system liquidity to N896.1 billion.

In line with liquidity dynamics, the open buy back (OBB) and overnight (OVN) rates continuously trended downward during the week, shedding 3.2 per cent and 3.4 per cent week-on-week, to close at 2.8 per cent and 3.4 per cent, from six per cent and 6.8 per cent respectively.
During the week, the treasury bills market traded largely bullish across benchmark instruments with discount rates moderating 22 basis points and 57 basis points for 91-day and 364-day instruments respectively, while the 182-day recorded 1.6 per cent increase in rate.

“Currently, the 3-month and 12-month instruments seem the most active on a comparable discount rate basis given a parabolic discount rate shape across benchmarks,” the report stated.

From the average treasury bills rate of 12.1 per cent the preceding Friday, the market opened somewhat flattish last Monday, but sustained a downward trend for the rest of the week before turning positive on Friday to close at 12.4 per cent.

The 12-month instrument was the most active, recording a discount rate moderation of 57 basis per cent week-on-week.
A treasury bills auction is expected to be conducted this Wednesday across the 91-day, 182-day and 364-day benchmarks.

This will largely shape the direction of rates as investor appetite for higher yielding instruments, amid emerging and frontier market routs, continue to shape the demand and supply dynamics.

Similarly, OMO maturities totalling N240.6 billion are expected to hit system liquidity in this week and is anticipated to shape money market rates movement.

Forex Market

The central bank maintained its market interventions last week, injecting US$210 million into the foreign exchange market via wholesale secondary market interventions earlier in the week.

Also, on Friday, the CBN injected the sum $303.91 million into the interbank retail Secondary Market Intervention Sales, making it a total of $513.91 million.

This was in addition to the sale of CNY 46.58 million in the spot and short-tenored forwards.    

CBN Director, Corporate Communications, Mr. Isaac Okorafor, had said  the exercise which was in tune with the CBN guidelines, were for the payment of Renminbi denominated Letters of Credit for agriculture as well as raw materials. He added that the sales in the Chinese Yuan were through a combination of spot and short-tenored forwards, arising from bids received from authorized dealers.

While noting that availability of Renminbi was sure to ease pressure on the Nigerian foreign exchange market, Okorafor attributed the relative stability in the foreign exchange market to the intervention of the CBN as well as the sustained increase in crude oil prices in the international market. He further assured that the CBN would remain committed to ensuring that all the sectors continue to enjoy access to the needed foreign exchange by Nigerians.

But analysts at Afrinvest argued that the cumulative effect of the CBN’s injection in the past three months had pressured reserves. “As a result, foreign reserves level declined by 4.8 per cent to US$45.5 billion (5th September, 2018), from US$47.8 billion recorded on 2nd of July.
“Consequent on the persistent interventions, the naira remained resilient in the week, with the currency trading flat in the parallel market week-on-week at at N361.0/$1.

“However, there were marginal depreciations recorded at the interbank and I&E windows, where the naira weakened to N306.20/$1 and N362.78/$1 respectively week-on-week.

“Also, the activity level in the I&E window improved to US$1.1 billion from $900 million, increasing 14.1 per cent week-on-week,” it stated.
In the FMDQ OTC futures market, the total value of naira settled OTC futures open contracts increased by 3.4 per cent to $4.5 billion relative to $4.4 billion recorded in the preceding week with subscriptions in JUL-2019, MAY 2019 and FEB 2019 as the most patronised.
This week, the naira is expected to trade at similar levels as CBN continues to sustain intervention in the market.

“In our opinion, continued interventions as well as possible outflows due to political risk will pressure the reserves in the coming months, we believe this might strain CBN’s ability to intervene frequently in the market,” Afrinvest insisted.

CBN Debits Four Banks

Following a fine of N5.87 billion the Central Bank of Nigeria (CBN) recently imposed on Stanbic IBTC, Standard Chartered Bank Nigeria, Citibank and Diamond Bank, the banking sector regulator last week debited the accounts of the respective banks. While Stanbic IBTC disclosed in a statement to the Nigerian Stock Exchange (NSE) that the central bank has debited its account, a CBN source told THISDAY that the amount has been deducted from the affected banks’ respective accounts at the CBN.

The CBN last week slammed a fine of N5.87 billion on four banks over the violation of extant laws and regulations of the Federal Republic of Nigeria, including the Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, 1995, and the Foreign Exchange Manual, 2006.

Also affected was MTN Nigeria, which the CBN directed to immediately refund $8,134,312,397.63, which was illegally repatriated by the telecoms company, to the coffers of the bank.

For the banks, the highest fine of N2,470,604,767.13 was slammed on Standard Chartered Bank, while Stanbic IBTC Nigeria was fined N1,885,852,847.45.

Citibank also got fine of N1,265,541,562.31, just as Diamond Bank was directed to pay N250 million penalty.

But Stanbic IBTC in a statement explained: “Following our earlier announcement to the NSE on 30 August 2018, in respect of the penalty of N1.886 billion imposed by the CBN on our banking subsidiary – Stanbic IBTC Bank Plc in relation to the remittance of foreign exchange on the basis of certain capital importation certificates issued to MTN Nigeria Communications Limited, we write to update the NSE that the CBN has debited the account of our banking subsidiary with the CBN for the full amount of the above stated fine advised to the bank.”

Taxes

The Executive Chairman, Federal Inland Revenue Service (FIRS), Mr. Babatunde Fowler, last week disclosed that the federal government realised N3.5 trillion from various taxes in the first eight months of 2018.

This was N1 trillion higher, compared with the N2.5 trillion generated by the country same period in 2017. The FIRS boss stressed that oil revenue was unsustainable, just as he reiterated the need to focus on ways to ramp up the country’s non-oil revenue.

“If you look at 2018 revenue till date, between January and August, we have done N3.5 trillion, which was N1 trillion higher than the amount realised over same period in 2017.

“You can clearly see that even at current prices, the oil revenue tax cannot fund our nation. The only way to have a high level of tax compliance is to focus on the non-oil.