Investors reprice fixed income instruments to reflect tightening

Investors in Nigeria’s Fixed Income (FI) market Wednesday commenced upward repricing of the instruments to take advantage of higher yields brought about by the tightening monetary policy by the Central Bank of Nigeria (CBN) on Tuesday, BusinessDay findings show.

The ushering of the higher interest rate era led to the shift from the equities market to the fixed income securities market, as the FMDQ OTC Securities market, for instance yesterday, showed uptick in yields on some bonds and treasury bills.

Consequently, at yesterday’s transactions, the bid price of 16-August-2016 bond declined to N101.80 from the preceding day’s level of N102.26 while its yield rose to 8.30 percent from 7.20 percent.  Also, the price of 27-April-2017 bond declined from N105.65 to N104.64 while its yield rose to 10.48percent from 9.63 percent.

The price of 27-July-2017 bond declined from N100.32 to N99.33 while its yield rose from 9.67 percent to 10.37percent.

The bid price for 31-August-2017 bond declined to N98.49 from N99.64 while its yield rose to 10.50 percent from 9.89 percent.

At the money market segment, the Nigerian Inter-Bank Offered Rates (NIBOR) for all tenors yesterday went northwards, as the overnight rate increased by 2.62 to 7.43 percent yesterday, from 4.81 the previous day. Also 1 month, 3 months and 6 months rose to 9.21, 10.47, and 11.77 percent yesterday, from 7.4, 9,01 and 10.50 percent respectively the previous day, data from FMDQ has revealed.

The CBN took markets by surprise by resuming its tightening cycle after a period of accommodative monetary policy, citing an increase in inflationary pressures as a major factor behind the decision.

Rising from a two-day meeting on March 22 where it reviewed domestic and international economic conditions in order to determine the policy direction for the next two months, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria increased Monetary Policy Rate (MPR) to 12 percent from 11 percent.

The MPC also changed the asymmetric corridor to +200/-500 basis points (bps) around the MPR from +200/-700bps; increased Cash Reserve Ratio (CRR) to 22.50 percent from 20 percent; and retained liquidity ratio at 30 percent.

This is even as the development has started its negative impact on the equities market with losses being recorded. At the equities market yesterday, there was mostly risk-averse disposition among investors, which caused equities to record its first loss this week. Consequently, the NSE All Share Index fell by 109basis points to 25,736.62 from 26,020.32, bringing the year-to-date returns to -10.14percent.

But analysts who spoke with BusinessDay last night, said the shift to the fixed income market was expected, as funds would naturally go to where they are  highly priced.

“With the MPR raised to 12 percent from the previous 11 percent, we anticipate the prices of the existing bonds to slightly begin to drop, thereby increasing the yields and making the bond market more attractive for investors, as new bonds will be issued at higher coupons”, said research analysts at Lagos-based Capital Bancorp plc.

Also, with regards to impact on naira assets, analysts at United Capital plc said yields on domestic fixed income (FI) assets will likely re-price upwards, “as investors adjust risk premium to current realities”, adding that investors will likely look to take advantage of higher yields in the fixed income market at the detriment of liquidity flows into the equities market.

“The price of fixed income instruments will decline. For instance, the coupon rates of bond issues priced to the MPR will change just as federal government debt cost also changes. With inflation presently at 11.4percent, the policy rate return in real terms changes to positive (0.6percent) from a negative value (-0.4percent)”, market analysts at Financial Derivatives said.

Looking at the bid for Treasury Bills (T-Bills) with maturity date of June23, 2016 its yield rose to 6.03percent; the yield for T-Bills with maturity date of September 22, 2016 rose to 7.97percent; while yield for T-Bills with maturity date of March 16 2017 rose to 9.28percent.

“A tightening move at this time only connotes that the Committee remains concerned about  the potential impact of rising inflationary pressures on real return of domestic naira assets (negative real returns and interest rate with 1-Year T-Bill and February core inflation at 9.3percent and 11.04percent respectively),” analysts at United Capital added.

“We expect the fixed income market to reprice yields higher to reflect both the monetary policy tightening and delayed reaction to inflation which had thrown interest rates into negative real return”, said the  Pabina Yinkere-led team of market analysts at Vetiva Capital Management Limited.

The price of 30-May-2018 bond declined from N101.15 to N100.03 while its yield rose to 10.67percent from 10.03 the preceding trading day.

Also, the price of 29-June-2019 bond dropped to N114.05 while yield rose to 10.77percent; the price of 23-October-2019 bond dropped to N87.75 while yield rose to 11.24 percent.

The price of 13-February-2020 bond dropped to N112.32 while yield rose to 11.51 percent; also among other, the price of 27-January-2022 bond dropped to N119.31 while its yield rose to 11.72 percent.

Financial Derivatives further said the CBN is expecting an increase in portfolio investment inflows in response to the increase in policy rate, but noted that “a 1percent per annum increase in MPR does not mitigate the possible devaluation risk to portfolio investors.”

Vetiva analysts added: “As expected, yields trended upwards in today’s (yesterday’s) trading session as market participants reacted to the MPC’s tightening stance. In the T-bills market, yields advanced 69bps on average with the most significant yield increases recorded on the 85DTM (+186bps), 99DTM (+156bps), and 134DTM (+152bps) bills closing at 8.05%, 7.83%, and 8.54% respectively. Similarly, yields on bond maturities rose 46bps on average with the short term maturities recording the most sizeable yield advances (up 64bps on average).”

Iheanyi Nwachukwu &  Hope Moses-Ashike