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Analysts predict fixed income market will remain bearish

IN a report, CardinalStone, a multi-asset investment bank, predicted that the fixed income market will stay gloomy in the coming month. According to the research, the average rates on Federal Government bonds and Nigerian Treasury Bills (NTBs) climbed by 42 and 97 basis points, respectively, in April.

According to the company, this occurred after cumulative maturities shrank by 8.1 percent month over month, reducing liquidity in the financial sector. Analysts say as a result, money market rates increased by around 145 basis points to an average of 8.0 percent in the month under review.

CardinalStone also noted that the April bond auction, in which the Debt Management Office (DMO) allotted N349 billion – 1.55x the tendered amount – showed signs of more aggressive borrowing. Demand was somewhat weak due to the weaker liquidity, with the bid-cover ratio hitting a four-month low of 1.82x, according to CardinalStone.

According to the firm, the auction could have closed higher if not for the 37.0 percent allotments to non-competitive bidders, which were at the top of the bid range at 14.0 percent. The NTB market traded on a dull note, according to CardinalStone, as the bid-ask spread disparity remained prevalent.

In April, only a few trades were completed in the secondary market, with NTB auctions being more active.

“In our view, the hush trading activity levels and bearish sentiment can partly be explained by the widespread, which continues to drive a rotation into corporate issuances and placements, both of which currently trade at premiums of between about 300 and 350 basis points over the one-year secondary market NTB yield of 4.76%”.

In May, Cardinalstone predicts that the bearish trend will continue. It predicted that higher borrowing costs and tighter liquidity would continue to drive market activity in the short term.

“Our position on the former is supported by the senate’s recent approval of an additional N1.0 trillion for PMS subsidy, which could translate to higher-than-expected domestic borrowings given the tightening global financing conditions.

“On the latter, a 14.5% decline in cumulative maturities will likely pressure banks’ liquidity position and drive placement rates higher”, the multi-asset firm stated. Elsewhere, market watchers are likely to be keen on May’s MPC meeting with inflation ticking upwards and monetary tightening intensifying across global markets.

CardinalStone also revealed that participants in the Central Bank of Nigeria (CBN) discount window changed their disposition as a result of liquidity moderation in the financial sector. Analysts also noticed that banks flipped from being net depositors to net borrowers in April.

According to the company, lower system liquidity and the government’s more aggressive borrowing plan, might fuel adverse sentiment in the Nigerian fixed-income market.

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