Fixed Income Quarterly Overview for Q2-2022

Macro-Economic Overview
Inflation was on a consistent upward trajectory this quarter, increasing by 201bps to close at 17.71%. This was driven by increases in food and energy prices, stemming from the Russia-Ukraine crisis. The IMF projects inflation in Nigeria to rise to 22% this year
MPR was hiked by 150bps in the May 23/24 meeting, retaining the +100/-700 asymmetric corridor, 27.5% CRR and liquidity ratio at 30%. The rate hike led to an upward repricing of yields in the fixed income market.
Brent crude closed the quarter c.8% up at $116 for a barrel. Oil price this quarter averaged $111.83 vs $97 recorded in Q1 2022. Q2 commenced with prices at c.$97 per barrel due to the China lockdown from COVID-19 spread fear; crude oil prices maintained the bull run in Q2, driven by the escalating Russia-Ukraine that threatened the supply of Russian crude to the West. Brent crude peaked at $123.58 per barrel on June 8, driven by summer gasoline demand in the US. The bull run is expected to continue in Q3 as the largest OPEC oil producers have signaled capacity limit on their production
External reserves grew by 455m to close at $39.1bn this quarter on the back of increasing crude oil price.
Opening at N371bn, the interbank market experienced a dearth of liquidity in Q2 to close at a N177bn repo. Interbank liquidity this quarter averaged 155bn vs N246bn recorded in Q1 2022.
FAAC disbursement in Q2 2022 grew by 4% QoQ. Total FAAC disbursement for the quarter was N2.06bn, thus yielding N976bn in inflow to DMBs.
As at end of Q2, the FG has achieved 56% of its planned local borrowing at N1.95bn
Coupon payments this quarter stood at N244bn, a 64% decline from N686bn in Q1’22 leading to tight liquidity in the market.
Bond Market
Yields in the bond market increased to close 45bps higher on average. This was driven by the 150bps monetary policy rate hike by the MPC, as well as the decline in coupon payments and OMO repayments during the quarter. Investors’ activity reduced in the market staying largely short, as they anticipate yields to peak in the bond market to attractive levels, before resuming participation.

During the quarter, the DMO sold N953bn in bond papers on the 2025s, 2032s and 2042s, with stop rates on the rise from 10.00%, 12.50% and 12.90%, to 10.10%, 12.50% and 13.15%, on the three papers respectively.
Treasury Bills Market
Activity in the treasury bill market was also driven by depleted liquidity in the interbank market, as well as the rate hike by the central bank’s monetary policy committee. Interbank rates averaged 9.81% vs the 7.59%, which represent a 222bps increase Q-o-Q. Yields in the treasury bill market thus increased by 213bps on average, Q-o-Q.
Eurobond Market
The SSA Eurobond market for most of the second quarter of the year experienced bearish sentiments on the back of the hawkish rhetoric from the Feds even as US CPI continue to overshoot. Despite IMF maintaining 2022 growth at 5.7% in the latest World Economic Outlook Update, most countries in the SSA space saw growth projections revised downward. The US 10Y treasuries hitting an 11-year high of 3.48%, further spurred heavy selling in the Eurobond space.
Country event
At the start of Q2’22, the Finance Minister Zainab Ahmed announced that the country had plans to raise $950 million latest in May in another Eurobond offering however, this plan was later cancelled over unfavorable pricing. Slight buy interests were seen across the shorter end of the Nigeria curve following the release of Q1 GDP figures which showed a slower growth by 3.11% from Q4 2021’s 3.98%. Nigeria also raised its benchmark rate by 150bps to 13%, the first hike since July 2016.
The news of GDP outperformance in Q4 saw buy interests across the paper however, this was short-lived and gave way to market sentiments around the SSAs . Q1 growth slowed to 3.3% YoY from Q4 21’s 7.0% expansion with the government having set a 5.8% growth forecast in November. This led to continued sell offs across the Ghana papers.
Just like Nigeria, Kenya announced plans to issue $1bn by July this year, however, later announced cancellation on the back of surging yields. The government is yet to receive the $238m loan from IMF as the board is yet to meet, meaning Kenya may need to find alternative sources to finance its current budget.
With Zambin’s restructuring plans still in progress, yields have continued to inch up across the curve despite the central bank holding the benchmark rate as inflation continues to buck global trends and slowing to 11.5% in April – the lowest since end-2019.
In Q3 2022...
  • - In the local fixed income market, barring the outcome of the MPC meeting, we expect a decline in treasury bill and bond yields, as coupon payment is expected to drive demand. N678bn in coupon is scheduled to be received in Q3 2022 vs N265bn received in Q2.

  • - We expect the SSA Eurobond space to remain volatile as risk-off sentiments continue amid the uncertainties around global economic recovery.

Disclaimer: All care has been taken in the preparation of the document and information in this document has been derived from reliable sources believed to be accurate and reliable. Parthian partners does not assume responsibility for any error, omission or opinion passed. The views and opinions expressed are for information purposes only.