Choked fixed income market sets returns on a spiral fall

By Moses Obajemu

As the Nigerian fixed income market continues to attract the interest of foreign portfolio investors, returns on government securities, especially Nigerian treasury bill, have begun a sustained downward spiral.

Nigeria’s securities instruments offer some of the best returns in the world, which has often led to an influx of foreign portfolio investments; and following effort at portfolio rebalancing by these foreign briefcase investors, there has been a divesting from Nigerian equities and investing in fixed income securities.

But analysts at Afrinvest and United Capital said the influx into the fixed income market has led to a moderation in yields, with the equities market being in limbo until recently when MTN Nigeria made its foray into the Nigerian capital market via listing by introduction, which revived the market after persistent losses.

Although the equities market has recently received a boost from the listing of MTN shares, investor sentiment remains weak, with capital market operators attributing the development to a reform and broad economic weakness in the country, despite cheap valuation relative to emerging and frontier market peers.

With many central banks putting a lid to rate hike, returns on investment in Nigeria are considered attractive at over 10 percent.

About a year ago, treasury bills yields ranged between 14-15 percent but things have since changed in the last couple of weeks when yields have dropped to between 11 and 12 percent, with analysts predicting that the downward trend in the yield curve may continue.

On March 13 this year, for example, the apex bank sold N89 billion worth of TBs in the primary market at lower stop rates. Stop rate for the 91-Days bills dropped by 15 basis points (bpts) to 10.75 percent from 10.9 percent in the previous auction held on February 27.

The stop rate on the 182-Days bills also dropped by five bpts to 12.5 percent from 13 percent in the previous auction, while stop rate for the 364-Days bills dropped by 152 bpts to 12.85 percent, the lowest since August last year, from 14.37 percent in the previous auction in February.

Between the first auction on January 16 and the auction held on Wednesday (March 13), stop rate on 91-Days bills dropped by 25 bpts to 10.75 percent from 11 percent on January 16. Stop rate on 182-Days bills fell marginally by six bpts to 12.5 percent from 13.1 percent on January 16.

The biggest decline was recorded by the stop rate for 364-Days bills which fell by 215 bpts to 12.85 percent from 15 percent on January 16. The above trend was driven by massive oversubscription (excess demand) for TBs fuelled by foreign portfolio investors seeking to take advantage of the high interest rate regime in the nation’s fixed income market.

Added to the glut in the fixed income market, the Debt Management Office (DMO), changed its borrowing strategy by relying less on domestic borrowing to fund government’s activities, preferring instead foreign borrowings, which are considered cheaper and have longer tenors.

DMO’s director general, Patience Oniha, said: “What the strategy means is that if the federal government depends on borrowing from the domestic market, first of all, it will be a question of borrowing at relatively high rate because we are a developing country; the level of interest rate would be higher than that of the advanced countries. That way, your interest cost is higher. It also means that your borrowing is concentrated on only one place.   If there is a tightening of liquidity or there is a slight challenge there, the impact could be heavy.

“The overall objective is diversifying your sources, reduce your dominance in the domestic market and I have explained the macro benefits to the real sector in terms of availability of credits, because government believes that the private sector should drive growth; so we want them to be able to access credits at good rate that would enable them make profit,” Oniha said.

With the equities market still weak and apparently not liquid enough, bearish activities are expected to continue until there are new carrots to attract the foreign portfolio investors back to the market.