The recent rise in bond yields has triggered a stock market sell-off that is in its 5th straight week. Last week, a T-bill with 364 days to maturity was sold at 5.5%, previously it had sold at 4.0% with analysts speculating that price would reach 10% before the year ends. This movement in the bond market has had an impact on stock market.
Since February, investors have lost a whopping N1.6 trillion in market capitalization as investors rotate liquidity away from stocks into fixed income securities. Analysts linked recent investors’ downbeat mood during the week to the result of the treasury bills auction.
They also opine that this could lead to a further decline in participation in the market when compared with the last released report NSE report on market operators on the Domestic and Foreign Portfolio Investment (FPI) flows. January 2021 and December 2020 showed that total domestic transactions decreased by 7.21% from N199.32billion in December to N184.94billion in January 2021. Furthermore, total foreign transactions decreased even more by 32.04% from N69.92billion to N47.52billion between December 2020 and January 2021.
In a chat with a Fixed income trader in UBA, Udegbunam Dumebi, he postulated that the recent move is not out of par when compared to the international markets, especially emerging economies. When international investors look at local currency yields, they usually compare yields with local inflation, with a simple inflation adjustment being an adequate guide.
In that regard, Nigeria would need to be more competitive. Hence it would not be alarming if we see higher yield rates. Take the one-year yield rate and adjust for inflation, you would realize that Nigeria is the least favourable when compared with Ghana or Kenya.
Dumebi also raised alarm about Nigeria’s debt and the ability to payback. Stating that for now, figures might seem normal but if Nigeria continues to increase its external and internal debts, repayments might be a problem in lieu of the mesmerizing growth ascertained by the Nigerian economy in 2021.
Another factor to consider is also the rising insecurity skyrocketing food prices and the disharmony between fiscal and monetary policy. Furthermore, he suggests that investors’ generally see higher yields as attractive, however, taking into cognizance the duration of risk in the bond market. It will be advisable for investors to remain risk-off while taking a position on yield with high coupons such as 2008 and 2029 bonds.
According to Dipo Adeoye, ED, Treasury & Operations, Abbey Mortgage Bank, there is naturally an inverse relationship between the bond yield and the stock market. That is, as the interest rate in the fixed market props up, investors with the view of risk to reward will be prudent to shift their assets to the bond market and away from the fixed income market. Hence, the recent move is natural with historical precedence.
He also identified the relationship between the bond market and inflation saying that they move in the same direction and any mismatch is always short- term. Adeoye’s advice to investors is to look for the right balancing point on their portfolios as he speculates that interest yield for the bond market would still increase further. His advice to investors is to be watchful and swift in taking advantage of the expected increase as delay may seem costly because when the bond yield reaches its optimal point, the demand usually surpasses the supply giving a kind of scarcity to the instrument.
Analysts advise investors to take positions in only fundamentally defensible stocks as recent market movement may hit corporate earnings negatively.
Nice write up!