Investor appetite for EM asset to remain muted despite Fed’s rate cut

Emerging markets may not see foreign investors piling into its assets this time around despite a quarter cut in United States’ policy rate as global concerns ranging from uncertainties surrounding Brexit negotiations to geo-political tensions linger.

Investors had already priced in the possibility of a first Fed rate cut in a decade, when the Powell-led Federal Reserve had sent dovish signals before its last meeting.

“Even most emerging markets are going more accommodative, the implication being lower yields,” said Gbolahan Ologunro, analyst at Lagos-based CSL Stockbrokers.

The Nigerian bond market is missing out on what should have been an increased buying interest from offshore investors following a 25 basis points cut in United States’ main interest rate on Wednesday.

The FGN bond market saw sustained demand pressure driven by local portfolio investors a day after the rate cut. Yields on the 10-year benchmark FGN bond note rose 25 basis points to 13.62 percent Friday, while the 2-year maturities dipped 2 basis points to 12.96 percent.

“Foreign portfolio investors drove the local bond market in the first quarter of the year,” Nnamdi Olisaloka, analyst at Zedcrest Capital said. “This is because they envisaged stability in the naira following the re-election of President Muhammadu Buhari in February.”

Yields of around 16 percent early this year trended lower on the back of buy interest of foreign players, however offshore interest has diminished with profit taking observed.

Foreign investors have become very short term on Nigeria and moved funds to money market increasingly of recent, which alongside the fact of an already priced in rate-cut explains reaction in local debt market.

“Going into the meeting analysts were very expectant on Fed’s forward guidance the 25bps was a given expectation,” Olisaeloka explained.

The analyst explained the market was unsettled by Fed’s uncertainty about a future rate cut-which Powell said would happen only if there are strong reasons.

The guidance disappointed investors who had already factored a further rate cut and resulted in selloff on Eurobonds in the early hours of trading and a slight recovery later in the day.

“But the thing with local bond is that they were not significantly impacted given low supply of local debt at current levels,” Olisaeloka said.

So far the market which has sustained buying interest has not been reacting to the activities of the Feds.

Although local players as opposed to foreign interest sustains demand in the domestic market, analysts believe the only reason for a bearish tilt of the domestic bond market would be if CBN becomes less accommodative of systemic liquidity and increases its rate of OMO issuances.