Fixed Income: Investors’ Renewed Appetite Raises Turnover to N23trn

Minister of Finance, Mrs. Zainab Ahmed

Activities in the Fixed Income and Currency (FIC) markets took a different dimension as investors who prefer to make short to medium-term investment, increased their stake in the markets by N6.85 trillion, thus lifting turnover to N23.21 trillion in August. Bamidele Famoofo reports

Turnover in the Fixed Income and Currency (FIC) markets for the month ended August 30, 2019 was N23.21trillion, representing a 41.87 per cent (N6.85trillion) month-on-month (MoM) increase on the turnover recorded in July 2019 (N16.36trillion).  Year-on-year (YoY), the markets recorded a 43.36 percent (N7.02trillion) increase compared to a turnover of N16.19trillion recorded in August 2018.

A monthly report on the performance of the FIC markets, released by FMDQ Securities Exchange, showed that treasury bills and forex (FX) product segments remained the major contributors to turnover in the FIC markets, jointly accounting for 79.33 percent of the total FIC markets turnover in August 2019 and representing an 8.95 percent increase in their joint contribution recorded in July 2019 (70.38 per cent).

 FX Market

Total FX market turnover in August 2019 was $25.69billion (N9.32trillion), representing a 76.82 per cent ($11.16billion) MoM increase.  “Analysis of FX turnover by trade type indicates MoM increase across all categories, with member-CBN trades recording the highest percentage MoM increase at 125.45 percent ($3.88billion), while member-client trades recorded the highest MoM increase in dollar (nominal) terms, at $6.28billion (68.92 per cent),” the report indicated.

Further analysis by product type indicates that the MoM increase in FX turnover was mainly driven by the 82.18 percent ($6.47billion) MoM increase in FX Spot turnover, with FX Derivatives turnover also reporting a MoM increase of 70.48 percent ($4.69billion).

In August 2019, the 38th Naira-settled OTC FX Futures Contract (NGUS AUG 21 2019) with a total contract value of $638.23million matured and was settled, with the Central Bank of Nigeria (CBN) introducing a new contract, NGUS SEP 30 2020 for $1.00billion at $/N365.47. This brings the total value of OTC FX Futures Contracts offered and settled since inception to date to $29.30billion and $11.01billion in open contracts.

In August 2019, the CBN Official Spot rate depreciated by $/N0.15 to close at $/N307.00. Similarly, the closing rate for the Naira against the US Dollar at the Investors’ and Exporters’ (“I&E”) FX Window depreciated by $/N1.25 to close at $/N362.93, while the parallel market rate remained constant at $/N360.00 in August 2019 Fixed Income Market (T-bill and FGN5 bonds).

Also, in August 2019, total OMO6 bills issued was N15.14trillion, representing a MoM decrease of 1.17 percent (N0.18trillion), whilst average T-bill outstanding was N2.58trillion, representing a MoM increase of 0.78 percent (N0.02trillion). Furthermore, average outstanding FGN bonds recorded a MoM increase of 1.74 percent (N0.15trillion) to close at N8.77trillion in August 2019 from N8.62trillion reported in July 2019.

The FIC performance update report for August showed that trading intensity for FGN bonds decreased from 0.15 in July 2019 to 0.14 in August 2019, while trading intensity for T-bill increased to 0.51 in August 2019 from 0.35 in July 2019. Year to Date, (YTD)7, trading intensity for T-bill and FGN bonds stood at 3.62 and 1.11 respectively compared to 3.47 and 1.03 recorded in the corresponding period in 2018, indicating a marginal pick up in fixed income secondary market liquidity.

 In August 2019, T-bill within the three months to six months (3-6 months) maturity bracket were the most actively traded among the short-term securities (i.e. 1month – 2years) accounting for 35.24 per cent of the total Fixed Income market turnover, while FGN bonds within the 15years – 20years maturity bracket were the most actively traded among the medium to long-term securities, accounting for 4.19 percent of the total Fixed Income market turnover.

Meanwhile, weighted average yields on the short- and medium-term Fixed Income maturities increased by 1.84 percent and 1.11 percent, respectively in August 2019 “which may be attributed to tight system liquidity which triggered selloffs, particularly on the shorter end of the yield curve.”

Conversely, weighted average yield on long-term maturities decreased by 0.15 percent as investors sought securities with higher returns, with the 2037 FGN bond showing an increase in demand. However, inflation-adjusted yield remained positive across all tenors in the period under review.

Turnover in the Repurchase Agreements/Buy-Backs segment of the Money Market increased Month on Month from N3.38trillion in July 2019 to N3.42trillion in August 2019, representing a 1.23 percent (N0.04trillion) MoM increase, whilst recording a 36.91percent (N0.92trillion) YoY increase from the turnover recorded in August 2018 (N2.50trillion).

The MoM decrease in total turnover in the Money Market by 0.59 percent (N0.02trillion) to N3.51trillion in August 2019 indicates a MoM decrease in liquidity in the inter-bank market. Consequently, the average Money Market O/N8 and OBB9 rates increased by 529bps and 500bps respectively to an average of 13.95 percent and 12.87 percent in August 2019 from 8.66 percent and 7.87 percent in July 2019.

Turnover in Unsecured Placements/Takings in August 2019 was N0.09trillion, representing a 41.43 percent (N0.06trillion) MoM decrease from the N0.15trillion recorded in July 2019, and a YoY increase of 32.56 percent (N0.02trillion) from the turnover recorded in August 2018 (N0.07trillion).

 Market Surveillance

Total number of executed trades reported on the E-Bond Trading System in August 2019 was 18,652 representing a 26.50 percent (3,907) MoM increase from the number of trades executed in July 2019 (14,745), driven by a MoM increase in T-bill trades by 32.87 percent (4,182). However, FGN bonds trades declined by 13.59 percent (275) in the review period ended August 31, 2019.