Despite Covid-19, Investors Splash More Money on ‘FIC’ Instruments

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Investors in the Fixed Income and Currency (FIC) markets defied the Covid-19 pandemic in March as they raised their stakes by N2.19trillion or 9.33 per cent to N25.66trillion. Investment in foreign exchange (FX) and OMO bills accounted for about 75 per cent of total turnover recorded in the markets in the review period with FX accounting for almost 50 per cent of gross turnover. Bamidele Famoofo reports

Turnover in the Fixed Income and Currency (FIC) markets for the month ended March 31, 2020 was N25.66trillion, representing a month-on-month (MoM) increase of 9.33 per cent (N2.19trillion) from the turnover recorded in February 2020 (N23.47trillion) and a year-on-year (YoY) decrease of 11.46 per cent (N3.32trillion) from the turnover recorded in March 2019 (N28.98trillion).

Foreign Exchange (FX) and OMO bills remained the most actively traded products, jointly accounting for 73.45 percent of the total FIC market turnover recorded in March 2020.

Total FX market turnover in March 2020 was $28.92billion (N10.73trillion), representing a MoM increase of 6.64 percent ($1.80billion) from the turnover recorded in February 2020 ($27.12billion).

Analysis of FX market turnover by trade type indicated that the MoM increase in FX turnover was driven by the 39.05 percent ($3.11billion) MoM increase in Member-CBN trade type to $11.07billion, offsetting the MoM decreases recorded in Inter-Member and Member Client trade types which recorded 2.43 per cent ($0.07billion) and 7.65 per cent ($1.23billion) decreases respectively in March 2020.

Further, analysis of FX market turnover by product type indicated that the MoM increase recorded was driven by the MoM increase of 25.77 per cent ($3.07billion) in FX Derivatives turnover, despite the 8.34 per cent ($1.27billion) decrease in FX Spot turnover. In the OTC FX Futures market, the near month contract (NGUS MAR 25 2020) with a notional amount of $1.28billion matured and was settled, whilst a new far month contract, NGUS MAR 26 2025 was introduced at an initial contract rate of $/N405.16.

The total notional amount of open OTC FX Futures contracts as at March 31, 2020 stood at c.$14.53billion, representing a $3.66billion increase on the value of open contracts as at February 28, 2020 (c.$10.87billion), while the total notional amount of OTC FX Futures contracts matured and settled to-date stands at $43.36billion.

The CBN adjusted its Official Spot US$/N exchange rate from $/N306.95 in February 2020 to $/N361.00 in March 20206 representing a depreciation of $/N54.05 (17.61%). The Nigerian Naira depreciated against the US Dollar in both the Investors’ and Exporters’ (I&E) FX Window and parallel market by $/N20.30 and $/N55.00 to close at $/N385.55 and $/N415.00 respectively in March 2020 (I&E FX Window – $/N365.25; parallel market – $/N360.00 as at February 28, 2020) due to the plunge in crude oil prices and the impact of the Coronavirus disease (“COVID-19”) pandemic on global economic output Fixed Income Market (T.bills7 , OMO bills and FGN8Bonds).

As at March 31, 2020, total Treasury bills (T.bills) outstanding remained flat at N2.65trillion; OMO bills outstanding decreased to N10.44trillion from N11.00trillion as at February 28, 2020, while FGN Bonds outstanding increased marginally by 0.85 percent (N0.08trn) to N9.47trillion. Liquidity in the T.bills market segment declined further in March 2020 as trading intensity fell to 0.08 from 0.13 in February 2020 as investors continue to hold their T.bills investment to maturity and discount rates on new issuances fell further by a range of 41bps – 117bps in March 2020. Conversely, the trading intensity for OMO bills increased from 0.61 to 0.76 in March 2020 as OMO bills turnover recorded a MoM increase of 14.04 percent (N1.00trillion) to N8.12trillion despite the drop in outstanding OMO bills MoM. Trading intensity for FGN Bonds decreased MoM to 0.26 in March 2020 from 0.28 as FGN Bonds turnover decreased MoM by 8.02 percent (N0.21trillion). YoY trading intensity for bills (T.bills and OMO bills combined) stood at 1.24 in March 2020, compared to 0.60 recorded in March 2019, whilst FGN Bonds stood at 0.26 in March 2020, compared to 0.18 recorded in March 2019.

In March 2020, bills within the 6 months – 12months maturity bucket remained the most traded across all tenors on the sovereign yield curve, accounting for 62.72 per cent of the total fixed income market turnover. FGN Bonds within the 20 year – 30year maturity bracket were the most traded among the medium to long-term securities (i.e. 5Y – 30Y), accounting for 6.34 per cent of the total Fixed Income market turnover.

Weighted average yields on short-term maturities decreased by 267bps, while weighted average yields on the medium-term and long-term fixed income maturities increased by 345bps and 107bps respectively in March 2020, driven by the increased demand for short-term securities by investors in the fixed income market.

Additionally, inflation adjusted yield remained negative across all short-term securities (1M-3Y), whilst medium to long-term securities (i.e. 5Y-30Y) excluding the 5-year tenor, recorded positive inflation adjusted yields in March 2020. The average discount rates for T.bills at the primary market declined further in March 2020, as the discount rates on the 91-day, 182-day and 364-day T.bills fell to 2.40 percent, 3.59 percent and 4.95 percent respectively, from 3.00 percent, 4.00 percent and 6.12 percent recorded in February 2020. However, marginal rates for the 5-year, 10-year and 30-year FGN Bonds increased to 10.00 percent, 12.50 percent and 12.98 percent respectively, from 8.75 percent, 10.70 percent, 12.15 percent recorded in February 2020 Money Market (Repurchase Agreements/Buy-Backs and Unsecured Placements/Takings).

Total turnover in the money market increased MoM by 19.07 percent (N0.66trn) to N4.13trillion in March 2020; however, this represented a YoY decrease of 25.33 percent (N1.40trn) from the turnover recorded in March 2019 (N5.53trn). The MoM increase in Money Market turnover was driven by the MoM increase in Repurchase Agreements/Buy-Backs segment which grew by 21.44 percent (N0.69trn) to N3.91trillion in March 2020 from N3.22trillion recorded in February 2020.

Conversely, turnover in Unsecured Placements/Takings decreased MoM by 12.27 percent (N0.03trn) to N0.21trillion in March 2020, but represented a YoY increase of 45.90trillion (N0.07trn) from the turnover recorded in March 2019. Average O/N9 and OBB10 rates both increased by 303bps to close at an average of 11.26 percent and 10.46 percent respectively in March 2020 from 8.24 percent and 7.42 percent in February 2020, indicating a further decrease in liquidity in the inter-bank market.

Market Surveillance

Total number of executed trades reported on the Bloomberg E-Bond Trading System in March 2020 was 9,409, representing a MoM decrease of 19.23 percent (2,240) against the number of executed trades recorded in February 2020 (11,649), driven by the decrease recorded across all executed trade types on Bills and FGN Bonds. This decrease can be attributed to factors such as lack of liquidity in the fixed income market due to limited supply of FGN Bonds and bills in the market, triggered by the COVID-19 pandemic.