Investors have started to react to the recent rate hike by the apex regulatory bank as equities shed N1.83 trillion a week after the Cardoso-led Central Bank of Nigeria (CBN) raised the Monetary Policy Rate (MPR), which is the nation’s benchmark interest rate, from 18.75 per cent to 22.75 per cent at the end of the 293rd Monetary Policy Meeting (MPC) held last week.
According to available information, all the 12 members of the MPC voted in unanimity to hike MPR.
Cardoso said after the meeting that the Committee’s decisions were centred on the current inflationary and exchange rate pressures, projected inflation, and rising inflation expectations.
“Members were concerned about the persistent rise in the level of inflation and emphasized the Committee’s commitment to reverse the trend as the balance of risk leaned towards rising inflation. The Committee, however, acknowledged the trade-off between the pursuit of output growth and taming inflation but was convinced that an enduring output expansion is possible only in an environment of low and stable inflation,” he said.
The equity market has begun to react immediately to the CBN announcement as the market capitalisation of listed equities closed at N 54.04 trillion last week Friday, 1 March 2024 compared to N55.86 trillion in the week that ended February 23, 2024, amounting a loss of N1.83 trillion.
The gradual rearrangement of portfolios by investors in favour of fixed income instruments followed projections made by many analysts after the CBN announced its decisions last week.
“We anticipate that the higher yields could stimulate further interest from foreign investors in the domestic fixed income market, resulting in improved capital inflows and potentially enhancing foreign exchange dynamics for the country,” said analysts at Meristem Securities.
The effect of the recent rate decision by the apex bank was seen in the capital, money and foreign exchange markets. The naira appreciated at the Nigeria Autonomous Foreign Exchange Market (NAFEM) by 7.57 per cent, from N1665.50/$ to N1548.25/$.
The Financial Derivatives Company (FDC), an investment cum think-tank firm based in Lagos, listed the immediate implications of rate hike to include sharp correction of the stock market, lending rates to increase across the country, borrower default rate to increase with the Nigerian currency expected to appreciate while the level of national savings will increase sharply accompanied with reduction in propensity to consume.
In the money market, most of the bond yields increased.
It should be noted that yield is the amount of cash flow an investor gets from the amount invested in a security. An increasing yield, all other things being equal, signifies lower risk and higher income because it implies an investor will recover higher amounts of cash flows in his or her investments.
The yield for the bond with 1-year tenor rose by 0.62 per cent to 22.60 per cent last week in comparison to 21.98 per cent during the week that ended February 23, 2024. The yield of the bond having 3-year tenor increased by 0.5 per cent to 17.05 per cent as against 16.55 per cent in the previous week.
The 10-year and 30-year bond yields increased by 1.92 per cent to 17.92 per cent from 16 per cent, and by 0.49 per cent to 17.95 per cent, up from 17.45 per cent in the previous week, according to the market data provided by Meristem Securities.
Money market rates witnessed increasing yields last week. The open buy back (OBB) rate, which is the rate used in raising short-term capital, rose to 27.16 per cent last week Friday, up from 24.91 per cent, while the overnight rate closed the week at 28.19 per cent from 25.75 per cent in the previous week.
Nigerian treasury bills with one-month tenor rose slightly to 11.57 per cent, up from 11 per cent in the previous week.
“The average stop rate surged by 650bps to 20% from 13.50% observed at the last auction. This was driven by increases in the stop rates for the short-, mid- and long-term instruments which rose by 900bps to 19%, 600bps to 19.5% and 450bps to 21.5%, respectively,” analysts at ARM Securities said.
“Furthermore, the average bid-to-cover ratio also increased significantly, rising by 75bps to 2.28x from 1.53x at the previous auction. This indicates a substantial increase in investor appetite for the offered instruments reflecting the current uptrend in yields. In the secondary market, the Nigerian fixed income market closed the week negatively, with average yields rising across board,” the analysts said.
The investment house has projected that the bearish sentiment in the equity market will persist for a while as investors seek higher returns in the fixed income market.
