Bonds, Treasury, OMO Bills Yields Tumble Ahead of DMO Auction
Bonds, Treasury and Open Market Operations (OMO) Bills saw their respective yields tumble ahead of the Debt Management Office auction scheduled for Wednesday.
The Federal Government of Nigeria, through the DMO, will be conducting a bond auction where a total sum of N150 billion will be on offer – all instruments on offer are re-opening issues as inflation worries slow down again.
In its latest report on consumers’ price index, the National Bureau of Statistics (NBS) figure shows that the headline inflation rate declined 37 basis points to 17.38% in July, from 17.75% in June. This marks the fourth consecutive monthly drop that started in April after 19 straight months of pressure.
Consequently, trading in the Nigerian Treasury Bills secondary market ended on a bullish note as the average yield contracted by 32bps to 4.6%, according to Cordros Capital’s market report. Across the benchmark curve, the average yield was flattish at the short end but contracted at the mid (-6bps) and long (-71bps) segments.
This occurred as investors bought up the 191-day to maturity, dropping 18 basis points and 331-day to maturity bills shed 120 basis points respectively. Similarly, the average yield at the open market operations (OMO) segment contracted by 10 basis points to 7.6%.
Similarly, the Federal Government bonds secondary market was also bullish as the average yield declined by 5 basis points to 11.5%. Analysts said across the benchmark curve, average yield contracted at the short (-2bps) and mid (-16bps) segments due to demand for the JAN-2022 (-10bps) and MAR-2027 (-65bps) bonds, respectively; the average yield was flat at the long end.
The financial system liquidity was stressed as interbank rates adjusted upward due to low inflow. The overnight lending rate expanded by 17 basis points to 17.7% as analysts noted the absence of any significant inflows in the system.
In a related development, the naira traded flat at NGN411.50 a dollar and N515.00 at the Investors and Exporters window and parallel market, respectively. In its report, Meristem Securities recall that DMO held its monthly auction in July 2021 where it offered NGN150 billion on 2028, 2035 and 2050 instruments collectively.
Analysts noted that the instruments on offer were oversubscribed with a bid to cover ratios of 1.13x, 1.47x, and 3.13x across the 13.98% FEB 2028, 12.40% MAR 2036 and 12.98% MAR 2050 instruments respectively.
“This is reflective of robust investors’ appetite despite persistently high inflation and the consequent negative real returns”
At the coming auction, analysts at Meristem Securities said they do not expect stop rates to trend higher, expressed the view that the federal government is less inclined (relative to much earlier in the year) to borrow domestically.
“Our thoughts are based on two main factors. Firstly, the government’s plan to raise USD6.20 billion in Eurobonds implies that about 87% of outstanding deficits -including deficit from the supplementary budget- can be financed with proceeds of the issuance, leaving about 13% to be financed via local borrowing.
Furthermore, analysts also noted that the ease in production cuts which took effect in August 2021, should translate to higher oil receipts and a generally better revenue outlook over the near to medium term.
In the secondary market for FGN bonds, the average yield moderated to 10.93% on Monday 16 August 2021 from 11.45% recorded on the date of the last auction.
“In our opinion, the bullish streak reflects strong investor demand and liquidity, in addition to a general expectation of a sustained decline in interest rates over the near term”, analysts added.
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Bonds, Treasury, OMO Bills Yields Tumble Ahead of DMO Auction
