MON 10 JAN, 2022-theGBJournal- The blend of significantly increased domestic borrowings on the back of external factors such as tight liquidity conditions globally due to policy normalisation in developed markets and weak appetite for sovereign assets with the looming elections point towards a higher yield environment in 2022FY.
‘’Also, monetary policy direction is likely to switch to a hawkish stance as the MPC will eventually have to weigh external concerns as FX illiquidity persists, while debt sustainability concerns will likely resurface in the face of a larger deficit. All of these further substantiate our expectations for yields’,’’ says Cordros Research said in their outlook report (Nigeria in 2022. Financial Markets Traversing the Murky Recovery) seen by the GBJournal.
Baseline expectation is that the average yields on Treasury bills and Treasury bonds will settle at c.7.0% and c.13.5%, respectively, by 2022FY.
Historically, electioneering periods have brought a significant amount of volatility in the Nigerian financial market, driven by capital flow reversals, weak domestic participation given concerns about variable income assets, and significant supply levels resulting in authorities allowing yields trend upwards to raise required funds.
Some of these considerations remain factors that will drive volatility in 2022FY. Specifically, It is expected that consternation regarding the elections will cause some segments of investors at the lower end of the risk spectrum to favour holding cash and reduce exposure to variable income fixed income assets, instead preferring assets such as fixed placements.
These segments will include retail investors and pension fund managers, while asset managers will actively participate in the market. Also, we anticipate that the DMO will allow yields to trend upwards in H1-22 as borrowings are frontloaded, in line with historical trends.
On the other hand, sell-offs of assets from FPIs will have less impact on the market, given that exposure is only significant in the OMO market, where yields are likely to be tethered by continuous sales at elevated yields, thus making the market levels resistant to sell pressures.
Again-Government borrowings will play a significant role in the direction of yields. While the existing borrowing plans, from the proposed budget, already points to significant borrowing plans over 2022FY – N4.45 trillion domestically (including maturing Treasury bonds and promissory notes) and NGN2.71 trillion (including maturing Eurobond) – the expected revenue underperformance points towards a need to borrow even more.
We anticipate that most of the borrowing will have to be done domestically given tighter liquidity conditions in global markets as policy normalisation commences, consternation regarding the pre-election period resulting in yield expectations that will likely be unpalatable for the fiscal authorities, tight liquidity domestically as the CBN continues to utilise unconventional monetary policies to achieve its overarching goal of price stability – elevated liquidity requirements and CRR debits –, and increased sub-national and corporate issuances as issuers frontload borrowings prior to a hike in yields, as already witnessed at the tail end of 2021FY.
All of these points towards an elevated yield environment in 2022FY.
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