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Fixed Income and Equity Monthly Update - February 2021

• Bond yields continue Northward sail:  The renaissance in the bond market carried on into 2021 as the average bond yield rose 104bps MoM to print at 8.49% in February (January: +174bpsMoM. Despite the overall monthly rise, we saw downticks during the first and last weeks of the month, with yields declining by 7bps and 14bps respectively. This was probably a result of investors taking up buying positions in response to expanding yields seen across the curve. Specifically, in week 1, demand was directed towards the Mar-2036 and Feb-2028 instruments which shed 42bps and 35bps WoW respectively while in week 4, the Mar-2025 (-181bps) and Jan-2026 (-145bps) attracted the highest demand.  Amongst individual bonds, the largest monthly selloffs were observed in the Apr-2029 (+188bps), Jul-2030 (+169bps) and Feb-2028 (+161bps) papers.

 

• NTB yields also recover further: In a similar trend to what we saw in the bond space, the average NTB yield firmed 44bps to 1.49% in February (January: +57bpsMoM). Anchoring the rise were upticks in the 182-day (+102bps) and 360-day (+90bps) bills. At the two auctions that took place during the month, the DMO offered a cumulative N298.00 billion worth of treasury bills, the same amount that matured in February. At the first auction, N 169.78 billion was offered but N130.88 billion was sold, despite a total subscription of N198.7 billion (subscription rate of 1.17x), while average stope rate rose 105bps to 2.33%. At the second and final auction, the DMO offered N128.21 billion, while total subscription was down to N192.06 billion, resulting in a subscription rate of 1.49x. Meanwhile, the average stop rate rose once again, this time by 134bps to 3.67%.  
• Investors pushing back in the auctions we have had so far this year has already led to higher primary market stop rates which has led to an upward repricing of secondary market yields. Any additional borrowing, to what was initially budgeted, would increase the supply of fixed income instruments which would make the high liquidity in the system less of an issue thus supporting higher yields. Barring any further surprises, the expectation now is for higher yields in 2021. But there are a lot of moving pieces and assumptions so the advice to investors is to stay short until the FG’s stance on how they will make up for the loss of backdoor funding from the CBN is clearer.
• Equities market set to trend southwards in H121: We see a need to review our equities market expectation for H1’21 following recent developments in the fixed income space. Surprisingly, we have seen an upward re-pricing in OMO yields in the secondary market very early in the year, which closed at an average of 6.29% at the end of February 2021, a significant jump compared to an average yield of 1.89% a month ago. Similarly, average yields in the fixed income space, according to data from FMDQ, has also shown material increase in February 2021 compared to the previous month. As such, the equities market recorded its first monthly loss in the year 2021 in February where it declined by 6.16% after a broad based sell-offs across most of the segments in the market.
• This is contrary to our expectations that proceeds from profit taking in some segments would be channeled into other segments of the market that either underperformed or recorded mild gain in FY’20 and are perceived to be positioned for a recovery in FY’21 as the negative impact of covid-19 eases. The broad-based sell-off across most of the counter is most likely a reaction to the upward re-pricing in yields in the fixed income space. Given our expectations that yields may continue to push northwards going into the remaining part of H1’21, we see the potentials for more profit taking in the equities market which may eventually lead to a negative performance at the end of H121.