Capital market analysts have said banks may reduce their positions in the fixed income market after the implementation of the Central Bank of Nigeria’s 50 per cent Cash Reserve Requirements on public sector deposits took effect on Wednesday.

According to analysts at Meristem Securities Limited, in a report on the CBN CRR policy and the financial market, the implementation of the new policy is likely to create a double edged sword for investors in the fixed income market.

The analysts, who observed that banks were major players in the market, said, “The new CRR requirement of 50 per cent may require that they reduce their positions in the market in order to comply with the new requirement, especially for the banks heavily exposed to public sector deposit.

“Besides, their participation going forward may be limited except if they are able to cover up with retail deposits.”

They explained that investors might also be forced to opt for shorter term bonds as the effect of a change of yield was much more apparent on longer term bonds. Another option, they added, was “exiting and re-purchasing when yields near their apex, at a reduced price”.

Already, the effect of the CRR is being felt in the market with analysts at Vetiva Capital Management Limited saying the treasury bills and bond market traded relatively quiet last week, “reflecting a cautious market in anticipation of the CRR debit that took effect on Wednesday.”

They added, “Yields on T-bills edged up, while yields on the bonds remained sticky, closing at their opening levels.”

Analysts at Meristem Securities, however, expect some investors to find high yields attractive.

They said, “For a new investor, the high yields would attract funds, especially when the horizon is short as the interest income may be higher than the capital loss from the reduced price as yield increases. We expect some investors to take advantage of this.”

Commenting on what will shape the market this week, analysts at Vetiva Capital explained that though yields at current levels remain attractive and present opportunities, traders in the fixed income market would weigh the immediate impact of Wednesday’s CRR debit.

 

Source: Punch (by Simon Ejembi)