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NSR H1 2021 Excerpts - Fixed Income Strategy - No bounce back for yields

Nigeria Strategy Report – H1 2021 Excerpts

 Domestic Economy and Markets

• In this afternoon’s cut-out of our core strategy document – The Nigeria Strategy Report, we look at the major themes that dominated the fixed income space over H2 2020 and delineate our outlook for 2021.
• It was a turbulent second half of the year for secondary market yields as sustained bullish sentiment kept yields pressured. This was in part attributable to a lofty maturity profile of N8.46trillion that matured during the period, but also the CBN’s decision to cut MPR by 100bps to 11.5%, a move that further diminished the allure of savings and drove investors in search of more profitable pastures. This saw average fixed income yield fall by 205bps in H220, as average bond and NTB yields shed 242bps and 270bps respectively. Similarly, in the primary market, stop rates continued their decline from H120. In the bond market the average stop rate declined by 341bps to close the year at 6.97% while in the NTB space the average stop rate dropped by 195bps over the half to 0.58%.
• Looking ahead to 2021, the FG have a planned borrowing of N2.34 trillion which we expect them to stick to, despite our forecast that fiscal deficit will print 17% higher (N5.74 trillion) than the FG’s budgeted amount (N4.89 trillion). The maturity profile is much lower this year compared to last year (N7.42 trillion vs N17.3 trillion) but there will still be enough liquidity in the system to keep yields subdued over 2021. We expect rollovers for the NTB maturities (N2.7 trillion) as well as the OMO maturities (N4.14 trillion). Meanwhile, we do not expect the N561 billion bond maturity in July to be rolled over, consequently translating to an addition to system liquidity. There are coupon payments totalling N877.7 billion this year which would further add to system liquidity (and overall demand) as well as an estimated N318 billion from net pension contributions. These will all add to the system liquidity which we estimate was at N658 billion as at the start of the year and ensure that demand exceeds supply over the course of the year, keeping yields subdued.