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Fixed Income Market Review

Global Market

The fixed income tumbled this year both in the developed and emerging economies, bond yields rose to record high levels with selloff sentiments. The market seems to have recovered from the covid-19 surge in 2021 but the eruption of the Russian-Ukrainian war in Q1 2022 triggered a global financial crisis, leading to the exit of investors to safer ravens, particularly in the US, UK, and EU, where the yields more than doubled.

The Fixed income performance was shaped mainly by the global hawkish monetary policy, higher inflation, recession risks, and negative returns. The Fed’s Hawkish Monetary policy pressured other central banks to follow in a similar direction which sparked recession fears that generated an inverted yield curve in most regions such as Germany, Canada, the US, and many more, a major indicator of recession. For example, the US 10-year bond had a lower yield compared to the 2-year bond, indicating investors are going long-term while selling off at the short end of the curve. 

Analysts note that historically, bond yields have been positive at times of rising interest rates as coupons offset price declines. However, the high inflation rates of 2022 resulted in negative returns. The returns pushed investors to exit the market for other safer assets, recording the biggest outflows recently.

The uncertainties made bond yields extremely high for most economies, reflecting lower investor confidence and diversion into safer assets. In the UK, the Bond yields rose to a record high of 4.24% in September reacting to the Liz Truss mini-budget saga, which prompted an emergency bond-buying programme for the long-dated maturities by the bank of England to tame the extremely high yields. Emerging markets were not exempted from the yields spike, Ghana’s had the highest at 34.3% in November as the country battled with dwindling revenue and debt sustainability.  

Comparing the bond yields of major economies in 2022 against 2021, the UK’s 10-year bond yield recorded the highest growth of +223.71%, followed by the US’s 10-year bond with +139.74% (Y-o-Y).  Surprisingly, China recorded the least growth of +2.92% (Y-o-Y) despite the slowdown in growth and rising covid cases, revealing strong investors’ appetite for the asset. For Nigeria, 10-year bond yields edged up (Y-o-Y) by +15.15% to 14.52%, the highest ever (see chart 7 below).      

Chart 7: 

Certainly, the rate hikes to tackle inflation will continue in 2023, although some countries have decided to go less hawkish such as New Zealand, Canada, Australia, and some others. The dovish stance should trim down yields in 2023, seeing that bond yields have begun to slow down in Q4 across countries. Particularly in China, the recent easing of covid-19 restrictions has spurred a rally in the country’s 10-year bond, dropping the yields by 50bps.   

Domestic Fixed Income Market

The performance of the domestic market was predominantly determined by system liquidity, inflation, and monetary policy. The liquidity tightness pushed up money market rates and fixed income yields to double digits, including short-term instruments. The 365-day yield on Nigerian treasury bills rose from 1.50% in January to 14.84% in December and the average marginal rates on bonds offered by DMO advanced from 12.50% in its January issue to 14.55% issued in December, driven by upward adjustment in the stop rates to attract investors. Seeing those investors generally lost interest in fixed income globally with the negative real return, the Federal government had to raise coupon rates to attract investors. 

Surprisingly, bond yields softened in Q4, warming up to the slowdown in the pace of rate hikes globally. The average bond yield peaked on November 9, 2022, at 14.82% as buying interests resurfaced bringing yields down to 13.31% as of December 29 irrespective of the 100bps rate hike and higher inflation figures in December. Some analysts attributed the inflow to the windfall of old stacked notes as the deadline for the swap gets closer (CBN redesigning policy). The sustainability of the recent buying interests seems sketchy as the old note will cease to be a legal tender by January 31, 2023, leaving the big Elephant (Inflation) and MPR’s direction to determine the fate of the market. Also, Debt sustainability fears with the mounting public debt stock at N44.06trn as of September 2022 might be another defining metric. In that light, Proshare analysts expect bond yields to remain elevated in 2023. 

Normally, the high-yield environment should discourage corporates from issuing debt instruments to raise funds as unsecured bonds or commercial papers require higher rates than risk-free instruments. The reverse was the case in this period, we saw huge issuances of commercial papers and corporate bonds both from small and large firms in 9 months of 2022, roughly, a total of N837.91bn commercial paper were quoted on FMDQ.  However, the insistent rate hikes affected private debt instrument issuances in Q4, the issuance subsided and might likely continue in 2023. 

Amidst the huge outflow, Fitch global rating agency downgraded the country’s long-term foreign currency issuer default rating (IDR) to ‘B-’ from ‘B’, six notches above default due to the high government debt cost and dwindling revenue. The downgrade suggests a higher credit risk that may feed into the cost of borrowing as the world bank recently commented on the country’s high debt servicing and debt stock. Nigeria’s public debt stock grew to N44.06trn as of September 2022 from N38.00trn in September 2021 with the huge budget deficit. The total debt stock excludes Ways and Means borrowed from CBN, amounting to N22.77trn in October 2022, (see table 31 below). 

Table 31: 

The harsh global market conditions made the FGN visit the Eurobond market once this year, US$1.25bn was raised in March at 8.75% coupon rate for a seven-year tenor. The non-issuance of the Eurobond led to the reliance on domestic bond issuance for funding, the DMO increased the monthly bond offer to N225bn in April from the previous issuance of N150bn. 

Rounding up the year, the FGN issued N100bn Sovereign Al’ ljarah Sukuk Bond which attracted an extra N130bn from investors with an oversubscription of 165%. The proceeds from the issuance will be used for the rehabilitation of road infrastructures across the country. The oversubscription at the recent Sukuk Bond issuance might make the federal government raise more Sukuk bonds in 2023. 

Activities on FMDQ

Despite the economic shocks, the fixed income and currency (FIC) market turnover for 2022 increased to N165.14trn from N162.59trn in the corresponding period in 2021, indicating a y-o-y growth of +1.57%. The FIC market had the highest turnover in September at N19.86trn while the highest month-on-month growth rate was in April, a +27.49% rise from N15.17trn in March to N19.34trn. The growth in April was driven by the +49.9% rise in the money market, +49.2% in foreign exchange, and +42.2% in CBN special bills. The lowest turnover during the period was in January at N14.13trn (see chart 8 below). 

Chart 8: 

Secondary Market 

For the secondary market, OMO bills led in terms of turnover in the fixed-income market, recording N20.67trn as of August 2022 which accounted for 37.7% of the fixed-income secondary market activity. The ranking is slightly similar to the previous year, only that CBN special Bills came from the rear-back in 2021 to the second position with a turnover of N14.89trn. The FGN bond followed closely and Treasury bills thereafter at 9.54 and 9.44 respectively (see chart 9 below). 

Chart 9: 

Money Market

The money market turnover was N46.69trn for January to October, representing 28.4% of the turnover of the FIC market. The money market turnover rose by +8.40% year-on-year from N43.07trn in the same period in 2021. The market had the highest turnover in July at N8.21trn while the lowest volume was in February at N2.86trn.

For the first four months of the year, the Open Repo Rate (OPR) and Over Night (O/N) remained at single digits as liquidity remained robust. As liquidity dropped, the rates increased significantly for the rest of the year, reaching a record high of 17.25% on 7^th October triggered by the monetary tightening. Proshare analysts expected the currency redesigning policy to stimulate liquidity and push down the interbank rates as bank deposits increased but the rates remained at double digits till the end of the year (see chart 10 below).

Chart 10: 

The Currency Market

The Naira averaged N427.92 against the US Dollar at the I & E FX window, indicating a year-on-year depreciation of +7.63% from the average of N409.66 in 2021 (see chart below). The severity of the FX shortage and strong appreciation in the US dollar worsened demand pressure this year, pushing down the value of the naira at both the official rate and parallel market. Basically, the parallel market became the only reliable option for industries as the Federal government had difficulty repatriating foreign airlines funds, amounting to $567m as of November. The currency had a free fall in the unregulated market with a spread of over N300 against the official market. According to CBN data, $11.42bn was spent on interventions to ensure exchange rate stability at the authorised currency windows between January and July against $10.75bn in 2021. The huge CBN intervention pull down the country’s external reserves to US$36.94bn from US$40.52bn in 2021. The CBN currency redesign triggered another record-low naira depreciation in October, naira fell close to N1000 to the US dollar at the parallel market. 

In February, the CBN introduced RT 200 programme in a bid to solve the FX crisis. The RT 200 programme is a non-oil export proceeds repatriation targeted to generate $200bn FX income in the next three to five years. Successfully, the scheme generated $4.98bn as proceeds in 9 months of 2022, showing an improvement in the diversification of FX revenue. With the expectation that the scheme will generate higher proceeds in 2023, the pressure on the naira should ease slightly. However, to effectively solve the lingering FX shortage, the demand side needs to be addressed through the adoption of a unified exchange window in order to discourage arbitrage and curb the high demand for dollars (see chart 11 below). 

Chart 11: 

FGN Eurobond Market 

The high-yield environment discouraged the issuance of Eurobond in 2022, the federal government issued only $1.25bn in March, a 7-year tenor at 8.75% coupon rate. The issuance had a high demand that the order book rose to a peak of $4 billion with investors from the United States, Europe, and Asia. Domestic investors participated in the offer with a total subscription of $60 million. 

The plan to raise an additional US$950m Eurobond to balance the $6.1bn external borrowing for 2021 was aborted due to the spike in yields, the average yields of Eurobond rose from 6.86% on January 04 to 14.05% on October 31, 2022. Meanwhile, the direction of the yields changed in November, sloping downward to 11.01% as of December 13. Proshare analysts doubt the issuance of Eurobond in 2023 as the yields remain extremely high but the federal government will rely on the domestic market to finance the N10.77 2023 budget deficit.