Thursday, March 10, 2022 / 05:30 AM / by Proshare Research/ Header Image Credit:  EcoGraphics

Fixed Income Market Review 

Fixed Income - Global Market

Two significant global themes dominated the fixed income market: the rise in US bond yields, which stemmed from higher inflation fears, and developments related to the pandemic. There was jostling between reducing or tightening COVID restrictions around the world, the appearance of new variants - Delta variant in H1 2021 and now Omicron - and their impact on the global economic recovery following the pandemic. 

Despite the uncertainties in the year, bonds yield advanced upwards for major economies, reflecting positive investor sentiment towards global economic recovery, moving investments towards risky asset classes.

Emerging-market bonds were supposed to be dragged down this year as central banks moved toward withdrawing stimulus. Instead, the best-performing global debt was all from developing nations. Sovereign bonds issued by Nigeria, South Africa, and India topped the rankings of the debt capital markets around the world in 2021.

Bond yields of major economies performed better in 2021 against 2020 except China's 10-year bond which fell year-on-year (Y-on-Y) by -13.13%. UK's 10-year bond yield recorded the highest performance with yields advancing by +385%. For Nigeria, 10-year bond yields edged Y-on-Y up by +72.74% (see chart 6 below).

Chart 6: Performance of 10-Year Government Bond Yield 

Source: investing.com, Proshare Research

Fixed Income - Domestic Market

System liquidity was a major market driver in the performance of the fixed income, majorly in the money market space, and maturity of fixed income securities accounts for a major component that drives liquidity. Corporates were expected to take advantage of the low yield environment to raise debt instruments, as access to funds was expected to be cheaper in 2021. The reverse was the case as the number of quoted commercial dipped Y-on-Y while average discount rates rose to double digits in the period, making short-term borrowing expensive for corporates. The total quoted commercial paper as of 7 January 2022 was N224.25bn against N390.7bn quoted on FMDQ as of 22 December 2020. Average discount rates rose from 5.41% to 12.32% indicating a Y-on-Y rise of +127.68% on rates. 2022 seems to be the year of rate hikes as a harbinger of economic recovery and a tool to control inflation. Access to funds is likely to be more expensive at domestic and international debt markets. Specific to Nigeria, we may see the crowding-out effect as debt stock is expected to rise Y-on-Y by +17.78% to N46.63trn according to the projections of the National Development Plan (NDP) 2021 - 2025. Also, the Sovereign risk may feed into the cost of borrowing at the international debt market as the World Bank recently alerted that the Nation's debt is vulnerable and costly. 

The imminent hike in rates by major economies may trigger flight out of the Nigerian market, however, we expect a corresponding and continuous rise in coupon rates as an incentive to remain in the Nigerian market. With declining inflation also, negative real yields may start to decline. Hike in rates translates to less cheap funds available for investment, thereby we will likely see a continuous decline in private companies accessing the debt capital market.

Locally, an increased fiscal deficit led to increased borrowing to finance the budget deficit. In 2021 (January to September), the Federal Government of Nigeria (FGN) added N5.09trn to FY 2020 figures, as of Q3 2021, total debt stock stood at N38.00trn (see table 62 below). 

Table 62: Public Debt Stock as of September 2021

Activities on FMDQ

As the COVID-19 induced shocks gradually faded, the fixed income and currency (FIC) market turnover for 2021 was lower than in the previous year. Between January - November 2021, turnover of the FIC stood at N178.4trn against N195.42trn in the period in 2020 indicating a Y-on-Y fall of -8.71%. The Foreign Exchange (FX) market was the major contributor to the FIC market in 2021. 

Turnover was at its highest in September and had the highest month-on-month (M-on-M) growth rate, recording N24.03trn in turnover indicating an M-on-M uptick of +94.89%. The improved performance in the month was on the back of a +109.44% rise in OMO and CBN's Special Bills market activity. The FIC market had its lowest performance in May recording N10.24trn in turnover and a -36.71% M-on-M decline supported by a -46.65% dip in OMO Bills trade (see chart 7 below).

Chart 7: Turnover of the Fixed Income & Currency Market Jan - Nov 2021  

Source: FMDQ, Proshare Research