News Column

Banks May Reduce Exposure to Bond Market in 2014

February 12, 2014

Eromosesle Abiodun

Following a steady rise in banks' loan books, Nigerian banks are expected to drastically reduce their exposure to the FGN bond market in the new- year, a report by FBN Capital has revealed.

Nigerian banks were over the years the dominant players in the FGN bond market when the Central Bank of Nigeria (CBN) allowed them free access to public sector deposits.

The report however predicted that the pension funds, who are also important players in the market, will now remain the dominant player given that they were badly burnt by the equity market shake-out in 2008 and 2009.

According to FBN Capital, "There is no regulatory cap on their holdings of FGN paper, and there are not many other fixed-income instruments to hold in their portfolios. We noted earlier that monetary policy has more impact on money market rates and bond yields than on lending rates to the real economy.

"The evidence is in the spike in rates for 90-day interbank money in the immediate aftermath of the hike in the Cash Reserve Ratio (CRR) for banks' public sector deposits. Liquidity can be tighter for other reasons such as fx demand and changing Federation Accounts Allocation Committee (FAAC) payouts."

They added, "FGN bond yields narrowed by more than 400bps between the announcement in August 2012 that Nigeria would be included in the JP Morgan government bond indices and March 2013. Yields have since backed up by around 200 bps on fears related to tapering by the US Federal Reserve. In the year ahead we see yields drifting slightly upwards on the same fears as well as concerns about domestic fiscal slippage.

"The achievement of single-digit inflation on the bond market will be negligible. The FGN bond market is also underpinned by strong domestic institutional demand at auction. In 2013 the Debt Management Office (DMO) raised an average of N75 billion ($470 million) each month at auction and received bids averaging N163 billion ($1.03 billion).

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Source: AllAfrica

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