Yields on Fixed Interest Securities Rise Amidst Liquidity Pressures
The average yield on fixed interest rate securities rise in the just concluded week at the secondary market amidst liquidity pressure in the financial system. This led to higher interbank rates while banks were seen repositioning their portfolios in the treasury market for bonds auction.
MarketForces Africa gathered that efforts by the Nigerian Debt Management Office (DMO) to reduce government borrowing costs is expected to keep yields on bonds down in the latter part of the year, according to some analysts’ projections.
Last week, proceedings in the federal government bonds secondary market closed on a bearish note, as the average yield expanded by 6 basis points to 11.4%.
Analysts at Cordros Capital Limited attribute the expansion in yields to investors’ reaction to the higher stop rates at the mid-week FGN bond auction albeit there were bids at the secondary market to fill unmet auction demand.
MarketForces Africa reported that at the bond auction, the DMO offered instruments worth N150.00 billion to investors through re-openings. The auction results indicated that the 12.50% FGN JAN 2026 recorded a bid-to-offer of 1.0x; with its associated stop rate rising 50 basis points to 11.65% from 11.60%.
Also, re-opening of 16.2499% FGN APR 2037 recorded bid-to-offer of 1.6x with stop rate of 12.95%, up 20 basis points to 12.75% and 12.98% FGN MAR 2050 saw a bid-to-offer of 2.4x with stop rate settled at 13.20%, up 20 basis points from 13.00%.
As expected, demand was high as DMO recorded a subscription: level of N250.71 billion; with bid-to-offer of 1.7x and eventually over-allotted instruments worth N192.76 billion, resulting in a bid-to-cover ratio of 1.3x, analysts said.
In the short term, Cordros analysts anticipate that yields will hover around current levels, given expectations of limited supply in Q4-21 and deliberate efforts by the DMO to reduce the government’s domestic borrowing cost.
In the money market, funding pressure kept short term rates slow down in check. Data from the FMDQ Exchange platform showed an uptick when compared with the previous week position.
Confirming the position, Cordros Capital analysts said the overnight rate was elevated in the double-digit region amid funding pressures for the monthly bond auction (N192.76 billion), CBN’s weekly OMO (N30.00 billion) and FX auctions.
However, it contracted slightly by 75 basis points against the previous week to 19.3%, following inflows from FGN bond coupon payments worth N32.67 billion,
In the coming week, Cordros analysts said they expect the OVN rate to trend northwards as the CBN should mop up the pent-up liquidity emanating from FAAC disbursements, FGN bond coupon payments worth N160.32 billion and N91 billion OMO maturities.
Still riding the bearish waves, trading activities in the treasury bills space resulted to an improved yield for the securities assets holders.
During the week, many local banks sold off instruments to fund their bids at the bond auction as the average yield across all instruments expanded by 8 basis points to 5.9%.
Across the market segments, analysts stated that the average yield expanded by 18 basis points to 5.4% at the NTB segment. Conversely, the average yield contracted by 3 basis points to 6.4% at the OMO segment.
Recall that on Thursday, the CBN sold N30.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions (103-day: 7.0%, 180-day: 8.5%, and 348-day: 10.1%).
Considering the expected strain on system liquidity and the prevailing bearish sentiments in the fixed income market, analysts at Cordros Capital said they expect average yields on T-bills to trend higher in the coming week.
They also expect quiet trading at the Nigerian Treasury Bills segment in the first few days of the week as participants position for the mid-week primary market auction where the Central Bank set to roll over N150.05 billion worth of maturities.
Elsewhere, Nigeria’s FX reserves continue to reflect the inflows from the International Monetary Fund (IMF) special drawing rights (SDR) and foreign currency borrowings as it sustained its weekly accretion and closed higher, near $41 billion marks.
Meanwhile, the naira was flat at N415.07 at the investors and exporters window (IEW) but appreciated by 0.2% to N571 to a dollar at the parallel market.
At the IEW, total turnover declined by 47.6% week to date to US$610.13 million, with trades consummated within the N405.00 – 444.00 to a dollar band. #Yields on Fixed Interest Securities Rise amidst Liquidity Pressures
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