Devaluation fears, inflationary pressure rife as fixed income market bottom out
Moses Obajemu
As fixed income and money market rates bottom out amidst some monetary policy changes initiated by the Central Bank of Nigeria towards the end of last year, there seems to be no end in sight on how long the market will wait for rates to climb up again.
Some analysts said continuous rates crash may induce inflation as some economic agents may choose to hold on to their cash, thus leading to increased money in circulation.
Treasury bills yield began to spiral after the third quarter of 2019 when the CBN stopped local individual investors from buying federal instruments at the Open Market Operations (OMO) of the bank. The restriction pulled funds from OMO and channeled them to T-bills dragging down T-bill yields as the price of bills went up.
The highest yield of 11.42 percent on the 91-day tenor bill was recorded in August and September of 2019 while the lowest yield of 3.53 percent was in January 2020. Likewise, the 182-day tenor bill recorded its highest yield of 14.47 percent in January 2019 while the lowest yield of 4.60 percentwas in January 2020. In the same vein, the 364-day tenor bill recorded its highest yield of 17.64 percent in January 2019 while its lowest yield of 5.81 percent was in December 2019.
In an analysis of the trajectory of the Nigerian treasury bills market in 2019 and 2020, Proshare, a firm of financial analysts, said in quarter one of 2019, the 91-day tenor bill recorded an excess subscription of N4.85 billion of the N3 billion which was offered by the federal government of Nigeria. There was a decrease in the excess subscription in Q2 2019 from N4.85bn to N270 million, this was attributed to the decrease in the range of bids rate of the 91-day tenor bill to+9.6%-13.0% from +10.3% -14% in Q1 2019.
In Q3 2019, there was an increase in the excess subscription to N1.46 billion from N270 million as a result of an increase in the range bids from +9.6%-13.0% to+10.4% -17%. Despite the decline in the amount offered to N2 billion from N3billion in the previous quarter and a decline in the range of bids rates of the Q4 2019 91-day tenor bill to +3%-6.3% there was a significant increase in the excess subscription of N22.72 billion as against the N2 billion amount offered in Q4 of the year. The reason for the sudden surge in excess subscriptions in Q4 2019 was the loss of confidence in the Nigerian equity market.
In an informed piece on falling rates titled,“The Nigerian Money Market Situation,” shared on social media, one analyst showed how dejecting the situation in the money market was, lamenting how keeping money in banks now makes people lose out because of low interest.
“As of today, GT Bank Plc is offering 1% interest rates on all fixed term deposits up to 50m Naira! You heard me right sir/ma! Meanwhile, same term deposit in a bank in Canada or US can get you at least 2.5%. At least, I said…. You may cross-check this assertion for your own good.
“Nigerian Treasury bill (NTB) rates went down as low as 2.5%! From 10-16% in the past. Stanbic-IBTC circular of today confirmed that long term instrument – FGN Bond rates in the secondary market is down to almost 6%”, the message revealed. The message attributed the regime of low rates to the N2 trillion borrowed by the federal government from the pension contributions of workers at low rates/
However, while providing insights into the reasons for the falling rates in the fixed income market, Damilare Asimiyu, a market analyst attributed it to the lower yields across the end of the curve, which now makes short term investment relatively attractive to “active traders”.
“ I think the driver of the decline in the range of bids of the NTB in recent times is the lower yields across the end of the curve, which now make short term investment relatively attractive to “Active traders”.
“For instance, the most recent primary auction of NTB for 91, 128, and 364 days on February 12 2020 was offered rates of 3%, 4%, and 6.54% respectively. With this, the real return on all the treasury bills tenor is negative given that the inflation rate is 12.13%. However, an active investor will prefer to trade on the short end (i.e. 91days) of the curve, hoping that if yield improves in the shortest possible period, he/she can exit his/her position and take advantage of the new attractive yield. But if the investor takes a position on the longer end of the curve (i.e. 365days), he will have to wait for 1 year before exiting his/her position or bear the cost of exiting before time.
Hence, active investors in a depressed yield environment will prefer to trade more on the short end than the longer end”, he said
.Asimiyu said a number of factors will even prompt an improvement in the coupon rate aside from the government conducting more primary market NTB to fund the budget deficit. According to him, inflation is rising faster than CBN can imagine due to some fiscal policy like the border closure that has driven up the cost of food items and the drop in fores inflows due to declining oil price and capital importation.
“Hence, all these factors will leave the government with no choice than to offer better coupons as investors reprice market risk”, he said.
On the long term effect of continuous rate reduction, he said the volume of domestic currency in circulation will increase drastically as the economic agents will prefer to hold or spend their resources on consumption than investing it.
“On the other hand, forex holders will seek for better yields in other climes where yields are more attractive than Nigeria. As such, naira’s value may become pressured thereby devalued”, he said.