Investors playing the short end of the Nigerian fixed income space should expect a repricing of Treasury bill (T-Bill) rates, on the back of risks to the Dollar – Naira (USD-NGN) exchange rate in the short to medium term.
“Our yield curve expectations are based on the stress factors we anticipate in the FX market in the medium term. These include a softer oil price, political uncertainty and further normalisation in US monetary policy next year,” said Standard Chartered analysts led by Samir Gadio, Head of the banks Africa Strategy and FICC Research in a September 08 note.
“As has occurred before in Nigeria, tight fixed-income valuations could pave the way for a sharp repricing of the curve as the market turns negative on the NGN, due for example to a shift in global risk sentiment.”
The direction of the yield curve and the exchange rate are closely inter-related, which suggests asymmetric risks to market rates from current levels, according to Gadio.
The exchange rate has remained firm recently with interbank USD-NGN trading in a tight 161-163 range since early July.
Stress on the NGN may however likely materialise from a weaker oil price combined with below-potential output.
OPEC yesterday reduced forecasts for the amount of crude it will need to supply by the most in at least three years as surging North American shale output reduces reliance on the group’s supplies.
The change implies that OPEC’s 12 members would need to cut output by about 1.1 million barrels a day from the 30.3 million they produced in August.
Nigeria gets up to 95 percent of dollar earnings and 80 percent of its Federal budget from oil revenues.
Nigerian short-dated yields have hovered near multi-month lows in recent weeks.
In the secondary market, the 3M-12M portion of the yield curve was in a 10.18-11.51 percent range as of 5 September.
The Central bank of Nigeria (CBN) sold N182.85 billion of 3M, 6M and 12M T-bills at 10.03 percent, 10.71 percent and 11.54 percent at its last auction on September 03.
The bid-to-cover ratio was 1.55 a lower demand than the earlier auction of August 20 this year, according to business Day’s analysis of CBN data.
Nigeria’s Treasury bill market whose active secondary market allows investors to exit easily is the second most liquid in Sub-Saharan African (SSA).
Treasury bills valued at N47.2 billion ($291 million) were traded on the over-the-counter (OTC) market on September 08, according to data from the FMDQ website.
The daily OTC volumes averaged the equivalent of $ 585mn in the January-July 2014 period.
The new CBN governor Godwin Emefiele has kept its benchmark rate at 12 percent while vowing to maintain price stability, although the ability to follow through on this is complicated by low fiscal savings and Nigeria’s increasing correlation with global markets.
Foreign appetite for Nigeria’s T-bills and bonds increased as loose global monetary policy and liquidity prompted investors to look for high-yielding risky assets.
Nigeria’s gradual integration with global capital markets and the increase in foreign participation since 2011 leave it more vulnerable to changes in external risk perception, says Standard chartered.
Investors who do not need to hold bonds and have to mark-to-market their positions should consider staying at the Short end of the curve, said Gadio.
“Our medium-term recommendation to investors is to average their positions by re-entering the trade at the short end at future primary market auctions (or occasionally in the secondary market) as upward pressure on the curve materialises.”
