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T-bills, FX still major drivers of fixed income, currency market turnover

…stood at N16.63trn in October …decreased by N2.57trn month-on-month …increased by N3.28trn year-on-year

Turnover in the Fixed Income and Currency (FIC) markets for the month ended October 31, 2019 was N16.63trillion, according to FMDQ FIC Market Summary.

The FIC market turnover in October represents month-on-month (MoM) decrease of 13.39percent (N2.57trillion) on the turnover recorded in September 2019 (N19.20trillion) despite representing a year-on-year (YoY) increase of 24.57percent (N3.28trillion) in comparison to the turnover recorded in October 2018 (N13.35trillion).

The report shows that Treasury bills (T.bills) and Foreign Exchange (FX) product segments persisted as the major drivers of turnover, jointly accounting for 71.41percent of the total FIC market turnover recorded in October 2019 but representing a MoM decrease of 701basis points (bps) compared to their joint contribution as recorded in September 2019 (78.42percent).

FX Market

Total FX market turnover in October 2019 was $13.97billion (N5.06trilion), representing a 22.90percent ($4.15billion) MoM decrease from the turnover recorded in September 2019. Analysis of FX market turnover by trade type indicated MoM decreases across all trade type categories, with Member-CBN trades recording the highest percentage MoM decrease at 30.85percent ($1.13billion), while Member-Client trades recorded the highest MoM decrease in dollar (nominal) terms, at $2.81billion (24.97percent).  Additionally, analysis by product type indicates that the MoM decrease in FX turnover was mainly driven by the 21.80percent ($2.46billion) decrease in FX Spot turnover.

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Similarly, FX Derivatives turnover recorded a MoM decrease of 24.73percent ($1.69billion) driven by the 38.02percent ($1.14billion) MoM decrease in FX Swaps turnover.  In October 2019, the Naira-settled OTC FX Futures Contract (NGUS OCT 30 2019) with a total open contract value of $1.19billion matured and was settled, and a new contract, NGUS NOV 25 2020 for $1billion at $/N366.22 was introduced.

This brings the total value of open OTC FX Futures Contracts to approximately $9.74billion, while the total value of contracts settled since inception to date stands at about $20.77billion.

In October 2019, the CBN Official Spot rate for $/N remained constant at $/N307. Similarly, the parallel market rate remained constant at $/N360, while the Naira depreciated against the US Dollar at the Investors’ and Exporters’ (I&E) FX Window by $/N0.43 to close at $/N362.66 in October 2019 ($/N362.23 in September 2019).

Fixed Income Market (T.bills and FGN bonds)

In October 2019, total OMO bills outstanding stood at N14.87trillion, representing a MoM decrease of 2.30percent (N0.35trillion), whilst average T.bills outstanding remained constant at N2.58trillion. However, average FGN bonds outstanding increased MoM by 0.79percent (N0.07trillion) to close at N8.90trillion in October 2019 from N8.83trillion reported in September 2019.

Trading intensity for T.bills decreased to 0.39 in October 2019 from 0.48 recorded in September 2019, however, trading intensity for FGN bonds remained constant at 0.11 in October 2019.

Year-to-date (YtD) trading intensity for T.bills and FGN bonds stood at 4.47 and 1.33 respectively compared to 4.39 and 1.29 recorded in the corresponding period in 2018.

In October 2019, T.bills within the 6M – 12M maturity bracket were the most actively traded among the short-term securities (that is 1M – 2Y) accounting for 41.23percent of the total Fixed Income market turnover, while FGN bonds within the 7Y – 10Y maturity bracket were the most actively traded among the medium to long-term securities (that is 2Y – 30Y), accounting for 4.74percent of the total Fixed Income market turnover.

Weighted average yields on the short, medium and long-term fixed income maturities decreased by 0.06percent, 0.16percent and 0.36percent respectively in October 2019. This can be attributed to the sustained interest in fixed income securities by foreign portfolio investors and local institutional investors due to favourable real returns compared to other asset classes.

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However, inflation-adjusted yield remained positive across all tenors in the period under review. Money Market (Repurchase Agreements /Buy-Backs and Unsecured Placements/Takings).

Total turnover in the Money Market increased MoM by 18percent (N0.57trillion) to N3.74trillion in October 2019, driven majorly by the Repurchase Agreements/Buy-Backs segment which recorded a MoM increase of 15.09percent (N0.44trillion) in turnover to N3.32trillion in October 2019 from N2.89trillion in September 2019.

Turnover in Unsecured Placements/Takings in October 2019 was N0.41trillion, representing a 48.19percent (N0.13trillion) MoM increase from the N0.28trillion recorded in September 2019, and a YoY increase of 516.02percent (N0.35trillion) from the turnover recorded in October 2018 (N0.07trillion). This can be attributed to the increased liquidity in the inter-bank market

Improved liquidity in the financial system is evidenced by the decrease of the average Over Night (O/N) and Open Buy Back (OBB) rates by 490bps and 460bps respectively to an average of 7.01percent and 6.23percent in October 2019 from 11.91percent and 10.83percent in September 2019

Market Surveillance

Total number of executed trades reported on the Bloomberg E-Bond Trading System in October 2019 was 9,731, representing a 26.43percent (3,495) MoM decrease in the number of executed trades in September 2019 (13,226), driven by the 28.20percent (3,394) and 8.49percent (101) MoM decreases in T.bills and FGN bonds’ trades respectively.

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