CRR debits and N326bn FGN bond auction expand overnight rate to 23%
The fixed income market traded in a mixed manner last week with overnight lending rate (OVN) expanding significantly by 375 basis point due to tight system liquidity.
During the week, OVN expanded to 23 per cent as debits for cash reserves ratio (CRR) by the, Federal Government of Nigeria (FGN) bond auction of N325.80 and Foreign exchange auction by the Central Bank of Nigeria (CBN) outweighed system inflows from Federal Account Allocation Committee (FAAC) disbursements of N363.86 billion and Open Market Options (OMO) maturities of N15.00 billion.
Nevertheless, market analysts expect trading to follow a similar pattern this week as bond investors continue to trade on post-auction sentiments.
However, analysts expect activity in the NTB and OMO market to be muted, as system liquidity remains constrained while the rates across the FX segment are anticipated to remain calm across all segments this week.
The Treasury bills secondary market extended its bearish run this week, as the tight liquidity in the system persisted. Consequently, the average yield across all instruments expanded by 25bps to 8.3 per cent.
Across the market segments, the average yield at the OMO segment closed 6bps higher at 9.7 per cent and similarly expanded by 54bps to 6.9 per cent at the NTB segment.
In the coming week, analysts maintained their view of a higher average yield on T-bills, given that we expect system liquidity to remain strained.
“Also, we expect quiet trading at the NTB market as participants position for this week’s PMA, with the CBN set to roll over N58.86 billion worth of maturities,” according to analysts in the market.
The Treasury bonds secondary market closed the week on a bullish note, as yields adjusted to the lower stop rates at Wednesday’s FGN bond auction. Consequently, the average yield expanded by 7bps to 11.9 per cent.
Across the benchmark curve, the average yield decreased at the mid (-6bps) and long (-19bps) segments due to investor’s demand for the FEB-2028 (-23bps) and APR-2037 (-63bps) bonds, respectively.
However, it expanded at short (+3bps) end following sell-offs of the JUL-2021 (+15bps) bond.
At the bond auction, the DMO offered instruments worth N150.00 billion to investors through re-openings of the 16.2884% FGN MAR 2027 (Bid-to-offer: 1.23x; Stop rate: 12.74 per cent), 12.5 per cent MAR 2035 (Bid-to-offer: 2.55x; Stop rate: 13.5 per cent) and 12.98 per cent FGN MAR 2050 (Bid-to-offer: 4.48x; Stop rate: 13.70 per cent) bonds.
Analysts at Afrinvest noted that the demand was stronger with a subscription of N417.48 billion in a bid-to-offer rate 2.8x compared to May which has a Subscription N281.97 billion in a Bid-to-offer rate of 1.9x.
During the week, the Debt Management Office (DMO) eventually allotted instruments worth N325.80 billion, resulting in a bid-to-cover ratio of 1.2x.
With a new week commencing today, investment analysts envisage average yields to trend lower, as investors are expected to take advantage of the increased supply in the market and cherry-pick mid and long-dated bonds.
In the foreign exchange segment of the fixed income market, Nigeria’s FX reserves sustained its decline, dipping by $215.62 million week-on-week $33.55 billion (24th June 2021).
Meanwhile, the naira depreciated by 0.2 per cent to N411.67 against the US Dollar and 0.4 per cent to N500.00 to a dollar at the I&E window (IEW) and parallel market, respectively.
At the IEW, total turnover as of 24th June 2021 increased by 2.7 per cent Week-to-date (WtD) to $580.84 million, with trades consummated within the N401.00 – 420.80/USD band.
In the Forwards market, the rate depreciated across the 1-month (-0.3 per cent to N413.10/USD), 3-month (-0.4 per cent to N417.16/USD), 6-month (-0.5 per cent to N422.19/USD) and 1-year (-1.1 per cent toN433.54/USD) contracts.
C0mmenting on the development, analysts said expectation is high on improved liquidity in the IEW over the medium term, given expectation of increased oil inflows in line with the rise in crude oil prices, and inflows from FCY borrowings.
“Accordingly, we expect the naira to remain relatively range-bound (N410.00/USD – N415.00/USD) at the IEW,” they concluded.