Dwindling Treasury Auction Stop Rate Drives Demand for Bonds
Reduce spot rates on Nigerian Treasury bills primary market auction drive demand for Federal Government bonds in the secondary market amidst improving liquidity in the financial system.
Last week, money market rates pressure eased significantly as inflow from maturing bills hit the financial system. Consequently, the overnight rate contracted by 15.33 points in the week to 8.5% while open buy back closed at 8.33%.
Codros Capital said in a report that inflows of N439.49 billion disbursed from the Federation Accounts Allocation Committee hit the system with N157.27 billion from OMO maturities and N49.89 billion FGN bond coupon payments outweighed funding pressures for net NTB issuances worth N150.13 billion and CBN’s weekly OMO of NG0.00 billion and FX auctions.
“We expect tighter liquidity in the system in the coming week as the CBN should mop up excess funding given its tight liquidity management posture”, Cordros Capital projected.
Also, analysts revealed the expectation that outflows for the weekly auctions outweigh the only expected inflows of N60 billion from open market operations (OMO) maturities.
Bearish sentiments returned to the Treasury bills secondary market sustained as market participants sold off positions to meet funding obligations following the tight system liquidity at the beginning of the week, Cordros Capital analysts said.
Consequently, the average yield across all instruments expanded by 16 basis points to 5.5% after return had felled behind 5% in the prior week as inflation worries drop.
Analysts are projecting a further slowdown in headline inflation rate for 2021, seeing rates declining at the Central Bank of Nigeria primary market auction during the week.
Analysts spotted that the average yield at the OMO segment expanded by 9 basis points to 6.0% across the market segments last week.
Similarly, the average yield at the Nigerian Treasury Bills segment notched higher by 27 basis points to settle at 5.0%. On Wednesday, there was a bi-weekly Treasury Bill Auction where the CBN offered bills worth N157.21 billion.
The Treasury bill auction was oversubscribed as analysts noted that the apex bank eventually allotted N307.34 billion, the highest amount recorded this year.
The CBN allocated N3.54 billion of the 91-day, N22.86 billion of the 182-day and N280.93 billion of the 364-day bills– at respective same stop rates of 2.50%, 3.50%, and 6.80% compared with 7.35% in the previous auction.
Amidst robust system liquidity, analysts’ noted that the subscription at this auction was expectedly high at N392.12 billion with a bid to offer ratio: 2.5x, resulting in a further cut in the 364-day spot rate
“We expect the yield on T-bills to inch higher in the coming week, given the expected tight liquidity picture”, analysts at Cordros Capital projected.
Also, proceedings in the Treasury bonds secondary market closed the week on a bullish note, as the average yield contracted by 23 basis points to 11.2%.
Cordros Capital analysts attribute the decline to the improved demand following the sustained improvement in macroeconomic conditions as signalled by the third consecutive quarter of positive growth.
It was also noted that further reduced stop rates at the mid-week Nigerian Treasury Bills auction drove an increase in demand for bonds in the secondary market in the week.
Across the benchmark curve, the average yield declined at the short (-32bps), mid (-25bps) and long (-18bps) segments as investors’ interest piqued on the JAN-2026 (-48bps), MAR-2027 (-32bps) and JUL-2034 (-49bps) bonds, respectively.
Read Also: Nigerian Treasury Bills Market Records Strong Demand
“In the coming week, we maintain our expectations of lower average yields in the face of limited supply and deliberate efforts by the DMO to reduce domestic borrowing costs for the government”, analysts added.
Dwindling Treasury Auction Stop Rate Drives Demand for Bonds
