Treasury Yield Inches Higher Amidst Inflation Worries
Treasury bill yields inched higher on Wednesday amidst inflation rate worries. After two months of consecutive decline in headline inflation, the market is expecting figures for June to drop due to low base effects.
Nigeria’s headline inflation rate reading for May 2021 printed at 17.93% while yields on fixed income instruments remain low single-digit. Analysts predicted that rates with remain tight as subscription levels at Treasury auction signal that free funds seeking higher returns.
Today, trading in the Nigerian Treasury Bill secondary market was bearish as the average yield expanded by 17 basis points (bps) to 7.0%, Cordros Capital analysts said in an email to clients.
Analysts said across the benchmark curve, the average yield expanded the short (+6bps), mid (+38bps) and long (+17bps) segments due to sell-offs of the 92 days to maturity (+34bps), 183 (+42bps) and 246 (+48bps) bills, respectively.
Meanwhile, in the money market, the overnight lending rate contracted by 450bps to 14.5% in the absence of any significant funding pressures on the system. Liquidity pressure had impacted short term borrowing rates in the space due to low inflow from maturing bills. .
At the Central Bank of Nigeria (CBN) primary market auction today, the apex bank offered N109.43 billion for sale with a total subscription coming at N574.68 billion.
Accordingly, the CBN allotted N5.24 billion for the 91-day, N7.60 billion for the 182-day and N137.30 billion for the 364-day bills – at respective stop rates of 2.50% (previously 2.50%), 3.50% (previously 3.50%), and 8.67% (previously 9.15%).
Elsewhere, the average yield at the open market operation (OMO) segment contracted by 23bps to 9.5%. Amidst the slowdown in yield repricing in the fixed income space, the Treasury bond secondary market was bearish today, as the average yield expanded by 3bps to 11.7%.
Across the benchmark curve, the average yield expanded at the short (+4bps), and long (+5bps) ends due to sell-offs of the JAN-2022 (+39bps) and MAR-2035 (+10bps) bonds, respectively.
Conversely, the average yield pared at the mid (-2bps) segment due to demand for the FEB-2028 (-10bps) bond. Analysts had predicted that robust subscription level will keep rates tight as CBN holds Auction.
Recall that the previous treasury auction saw average stop rates declined to 5.03% from 5.13% driven by a decline in the rate offered on the 364 day instrument (to 9.15% from 9.40%).
Meanwhile, rates on the short (91-Day) and medium (182-Day) term instruments remained unchanged at 2.50% and 3.50% respectively.
Meristem Securities Limited said in a market report that the direction of rates continues to be influenced by strong investor subscription (particularly on the 364-day instrument), and the need to minimise the Federal Government’s borrowing cost.
Relative to the previous auction, it said the FGN’s appetite for 364 day bills was significantly stronger, thus overall bid-to-cover ratio reduced to 2.73x (from 9.21x) despite increased subscriptions.
“In the coming auction, we expect the rates on the 91- and 182-Day instruments to remain unchanged in line with recent trends”, the investment firm said.
However, analysts at Meristem Securities said they expect a further moderation in the rate on the 364-Day instrument, due to sustained robust investor appetite.
“This is in addition to further pressure on debt service charge arising from the need to finance the deficit in the NGN982.84bn supplementary budget approved by the National Assembly last week”, analysts added.
The investment firm hinted that the sentiment in the secondary market has been largely bullish since the last auction, as investors turned to the secondary market to fill unmet demand at the PMA (especially on the long end of the curve).
Furthermore, it said the market has been reacting to the downtrend in average stop rates at recent PMAs. Market data shows that average T-bills yield fell to 6.23% as at 12th July 2021 from 6.74% from the last auction date.
Nevertheless, Meristem Securities analysts said they maintain that over the near term, the average yield will rise slowly
Treasury Yield Inches Higher Amidst Inflation Worries
