Investors increase stake in bonds on back of financial system liquidity


October 26, 2015 | 10:42 am
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naira to slide at alternative market on CBN’s BVN policy


The robust liquidity levels in the financial system have given investors the capacity to increase their stakes in the domestic FGN bond market, as majority of the foreign investors have exited the market due to foreign exchange (FX) related uncertainties, according to analysts at Afrinvest Securities Limited.

Consequently, the bond market sustained its bullish run last week with increased buying interest in some short- to mid-term tenured instruments (FEB 2020, JAN 2022, MAR 2024) with yields down 56bps, 61bps and 57bps, respectively, while the yield on the 20-year benchmark instrument JUL 2034 was down 12bps.

In recent weeks, investors have been very bullish on the fixed income space as the bond market has been on a bullish run for some weeks now with increased participation from domestic investors.

A report by the firm noted that on Tuesday, this bullish run was sustained however, there was reduced interest in short to medium term instruments from the previous day as investors interest shifted to the longer tenured instruments with decline in yields on the MAR 2024 and JUL 2034 instruments driving average yields southwards. On Wednesday, however, there was a reversal in trend as the market turned bearish majorly due to the contraction in liquidity levels in the financial system as well as profit-taking activities, which drove yields northwards (average yields up 50bps).

On Thursday, the bearish run was sustained as reduced activity coupled with increasing profit taking led to an increase of about 20bps across all instruments. Given the mixed performance in the market during the week, average yields across benchmark instruments climbed 30bps to 14.2 percent.

“We anticipate liquidity level in the financial system to improve in the coming week which may buoy activity,” Ayodeji Ebo, head, investment research and his team of analysts at Afrinvest said in a report.

On the other hand, analysts at Cowry Asset Management Limited expect depreciation in the alternative market segments, as FX traders price is the cost of the additional CBN requirement for Bank Verification Number (BVN) in all FX sales by Bureau de Change (BDCs).

In the interbank market last week, the naira experienced some slight movements. On Monday, the naira traded at N199.10/$, but appreciated by 2kobo on Tuesday (N199.08/$) after the CBN reduced its intervention rate by 2kobo to N196.98/$. This was sustained on Wednesday and held till the end of the week.

At the BDC, the naira appreciated N2 at the start of the week (N224/$), however, with increased pressures on the naira, there was a N1 depreciation to N225/$1.

At the money market last week, liquidity levels remained robust all through the week, which is in line with the recent trend, although lower than the levels in the previous two weeks.

Hence, interbank money market rates remained at their low levels at the start of the week – 0.8 percent for the Open Buy Back (OBB) and 1.0 percent for the Overnight (O/|N) – majorly due to the robust liquidity level in the system (over N800bn).

On Tuesday, rates rose marginally as the OBB advanced 29bps to 1.1 percent and the O/N rate up 50bps to 1.0 percent. The increase in rates was due to the scheduled FX intervention sales on Thursday for which deposit money banks were required to provide funds 48-hours in advance.



October 26, 2015 | 10:42 am
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