While Nigeria continues the controlled FX regime amid doubt about immediate recovery in the crude oil market, fixed income investors, whose portfolios were a mix of short-to-long term instruments are taking a flight to safety at the short-end of the market due to the poor economic outlook.
For instance, short-term instruments like Treasury Bills (T-Bills) and that of secured Money Market such as Repurchase Agreements/Buy-Backs, pushed the turnover in Fixed Income and Currency (FIC) markets at the FMDQ OTC Securities Exchange to new highs.
Turnover of transactions carried out in the Fixed Income and Currency (FIC) markets for the month of April 2016 which settled at N9.43 trillion increased by 9.86 percent or N850 billion over the value recorded in March.
Nigeria’s first-quarter (Q1) 2016 GDP figure, which showed a contraction in economic activities (declining by 0.36 percent) year-on-year (y/y) is a reflective of investors’ sceptical view on Nigeria’s economy outlook in the short to medium term.
“Amidst the general economic uncertainties, volume and value of transactions have weakened significantly across the Nigerian trading platforms (both fixed income and equities) as investors maintain a risk averse sentiment,” Pabina Yinkere, head, Research Division, Vetiva Capital Management Limited, said in an email response to this development.
“It is therefore not surprising that T-bills and secured money market instruments (low risk investments) account for a significant portion of the monthly turnover at the FMDQ, as investors search for a safe haven,” he said.
Activities in the Foreign Exchange (FX) market accounted for 16.69 percent of the turnover, as against 18.67 percent recorded in March, while Treasury Bills (T-Bills) transactions continued to dominate, accounting for 42.03 percent of the total market; 4.37 percentage points higher than the previous month.
Secured Money market (Repurchase Agreements/Buy-Backs) and FGN Bonds transactions accounted for 30.47 percent and 9.41 percent of the total turnover respectively, whilst Unsecured Placements/Takings contributed 1.39 percent to total turnover.
In a telephone response to BusinessDay on the OTC debt market turnover, Kaodi Ugoji, vice president at FMDQ OTC Securities Exchange said, “Market sentiment geared towards short-term investments. That is why you are seeing increasing transactions in the short end segment of the market because investors are not too sure what the market holds in the long-term with an uncertain outlook.”
Transactions in the FX market settled at $6.10 bn, about 6.99 percent or $460 million drop compared with the value recorded in March. On a YoY basis, FX turnover declined by 48.69 percent. Member-Member trades recorded $710 million in turnover for April, compared with $590 million recorded in March, indicating an increase of 19.36 percent.
Turnover in the Member-Client category, on the other hand, settled at $5.39 billion- a dip of 9.60 percent from the previous month. On an aggregate, turnover on spot transactions dropped 19.92 percent to settle at $4.23 billion, while transactions in the Swaps market increased by 28.61 percent to end the month at $1.61 billion.
FX Options transactions worth $80.16 million were also recorded within the month. The CBN’s exchange rate remained flat at $/N196, whilst the naira opened the month at $/N199.06 in the inter-bank market and closed at $/N197.89, translating to an appreciation of 0.59% of the currency. Rates in the parallel market averaged $/N318.94 during the period under review.
Turnover in the Fixed Income market settled at N4.85 trillion representing 17.35 percent or N720 billion above the value recorded in the previous month, with transactions in the T-Bills market accounting for 81.72 percent of the turnover compared with 78.21 percent recorded in March.
Vetiva analysts said last week that demand for fixed instruments will ease as “we note the overall bearish outlook, even as investors continue to speculate ahead of the next MPC’s meeting. Similarly, we expect the bond market to trade cautiously as investors stay off duration risk ahead of the meeting.”
Outstanding T-Bills stood at N5.41 trillion in the month, whilst outstanding FGN bonds increased 2.73 percent to close at N6.41 trillion. Trading intensity in the Fixed Income market settled at 0.74 and 0.14 for T-Bills and FGN bonds respectively, with maturities between 1-month and 3-month being the most actively traded in the review period.
The yield curve closed the month on an upward slope. Yields on the short-end of the curve dipped 3.16 percent on the average, while mid- to long-term yields gained by 5.17 percent and 2.95 percent respectively, leading to further widening of the spreads between short- and long-term yields.
Activities in the Secured Money market (Repos/Buy-Backs) settled at N2.87 trillion, 8.90 percent (N234.68 billion) above the value recorded in March, while Unsecured Placements/Takings dropped 36.45 percent to close the month at N130.93 billion.
The number of executed trades captured on the E-Bond trading platform for April was 16,260 against 15,738 recorded in March, an increase of 3.32 percent.
Although, there was a decline of 5.71 percent in order book trades, request for quote (RFQ) recorded an increase of 10.93 percent. E-Bond trades for T-Bills increased by 10.10 percent, while trades on FGN bonds declined by 11.76 percent.
IHEANYI NWACHUKWU
