July 30, 2023/CSL Research
Recently, the Federal Reserve of the United States of America raised its federal fund rate by 25 basis points (25bps) to the range of 5.25% – 5.5% (the highest level in 22 years). Citing inflationary risks across its region, the governing council of the European Central Bank (ECB) increased its interest rates by 25bps. Consequently, the interest rate on main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.25%, 4.5% and 3.75% respectively, effective 02 August 2023. Citing the continuous rise in the nation’s Headline Inflation rate, the Monetary Policy Committee of the Central Bank of Nigeria’s (CBN) took the same stance as its international peers by raising the Monetary Policy Rate (MPR) by 25bps to 18.75% at its last meeting.
The impact of these hikes on the benchmark interest rates will be minimal in the Nigeria fixed income market. Rising interest rates in advanced economies have been a major factor in the flight of Foreign Portfolio Investments and we do not expect a reversal of this pattern. The driving force in the local fixed income sector remains liquid, driven by heightened investments from institutional investors. Amid mixed sentiments in the fixed income market, liquidity improved in H1 2023 to the tune of N49.71tn (+97.27% y/y from N25.2tn in H1 2022) as investors positioned themselves in instruments that had attractive yields. The Nigerian Treasury Bill (NTB) average yield settled at 6.16% in H1 2023 (compared with 3.67% in H1 2022) with investors’ buying interest tilting towards to the mid-end of the curve in the secondary market. Demand across all tenors of the Federal Government of Nigeria (FGN) Bonds were relatively heightened in the period as the average yield settled at 11.77% compared with an average yield of 10.37% in H1 2022.
In the primary market, the total allotment of NTBs was N2.40bn (in excess of the total offer of N2.10bn) in H1 2023. However, this was lower by 3.4% y/y than the total allotment of N2.48bn in H1 2022. The average discount rate of the NTB across its tenors ended at 5.72% in H1 2023 from a 3.55% yield in the prior year. In the same vein, the Debt Management Office (DMO) had allotted the sum of N3.16bn across its tenors FGN Bonds which was above the total value of N2.2bn with an average margin rate of 15.1% in H1 2023.
Liquidity in the fixed income market will be most impacted by the lessened restrictions on interbank placements and investors’ reaction to recent policies. Consequently, improved liquidity in the market should cause a downward move in the yields, especially at the short end of the curve. Therefore, we envisage that yields may expand by 100 basis points (bps) at the mid- and long- end of the curve in the second half of 2023. Based on the big changes seen on the macro-economic front, investors’ demand will be pulled towards the short – and mid – end of the curve.