Yields Rise as Banks Sold T-Bills to Meet Liquidity Demand

Deposit money banks (DMBs) reduced their holding on Nigerian Treasury bills in the secondary market amidst pressures on the financial system liquidity, according to analysts’ notes.

Last week, the financial system liquidity position was strained, causing short-term rates to rise. Both open buy back and overnight lending rates inched up into the double-digit regions, data from the FMDQ Exchange shows.

The overnight rate stayed in the double-digit region through the week, according to analysts at Cordros Capital Limited. Data from the market shows that the overnight rate rose by 308 basis points in the week to close at 14.0% as system liquidity remained constrained.

Debits for the FGN bond worth N226.13 billion and foreign exchange (FX) auctions by the monetary authority put heavy pressure on liquidity in the absence of any significant inflows.

For this week, Cordros capital analysts said they expect the overnight lending rate to remain elevated, as outflows for CBN’s weekly auctions (OMO, FX and NTB) will likely keep system liquidity strained with no significant inflow expected.

In the treasury bills segment, the bears dominate the secondary market last week as the depressed system liquidity triggered sell-offs from local banks as they sought liquidity to fund their daily obligations.

Consequently, the average yield across all instruments expanded by 26 basis points to 4.9%. At the open market operations (OMO Bills) segment, the average yield inched higher by 59 basis points to 5.2%.

“We still expect the average yield on T-bills to maintain its uptick next week, given the tight liquidity picture. Also, we expect quiet trading at the NTB market as participants’ position for next week’s PMA, with N174.09 billion worth of maturities on offer”, Cordros Capital stated in a market note.

Elsewhere, the value of FGN Eurobonds traded at the international capital market depreciated for all the maturities tracked on renewed bearish sentiment.

The 10-year, 6.375% JUL 12, 2023 bond, the 20-year, 7.69% FEB 23, 2038 paper and the 30-year, 7.62% NOV 28, 2047 debt lost $0.07 , $0.75 and $1.07 respectively; while their corresponding yields rose to 8.50% (from 8.39%), 13.42% (from 13.25%) and 12.84% (from 12.62%) respectively.

Cowry Asset analysts expect to see increased bearish activity in local FGN bonds space as FGN Eurobonds yields appear to be relatively high. In the secondary market for FGN Bond, trading activities ended with a bullish sentiment as investors covered for lost bids at the primary market auction conducted by Debt Management Office.

Due to sell pressures, the value of FGN bonds traded increased, while yields tracked lower. As a result, Cordros capital analysts said the average yield across all instruments contracted by 5 basis points to 11.1%. Across the benchmark curve, analysts indicated that the average yield contracted at the short (-4bps), mid (-1bp), and long (-11bps) segments.

This happened following buying interests in the MAR-2024 (-19bps), APR-2032 (-5bps), and APR-2037 (-28bps) bonds, respectively. Recall that at the primary auction, the DMO offered instruments worth N225.00 billion to investors through re-openings of the 13.53% FGN MAR 2025 bond at a stop rate of 10.10%.

The 12.50% FGN APR 2032 was priced at 12.50%) and 13.00% FGN JAN 2042 at 13.15%. Total subscriptions across the offered instruments settled at N552.36 billion, with the DMO eventually allotting instruments worth N259.28 billion, resulting in a bid-cover ratio of 2.5x.

“We reiterate our view of an uptick in yields in the medium term as the FGN’s borrowing plan for 2022 and expected fiscal deficit point towards an elevated supply”, Cordros analysts stated.

The 10-year, 16.29% FGN MAR 2027 instrument inched upward by N0.12 to N120.20, the 15-year 12.50% FGN MAR 2035 surged N0.66 to N100.27, the 20-year 16.25% FGN APR 2037 jumped N2.22 to N125.36 and the 30-year 12.98% FGN MAR 2050 bond rose N1.05 to N99.88.

Their respective yields declined to 10.72% (from 10.76%), 12.45% (from 12.56%), 12.45% (from 12.73%) and 12.99% (from 13.13%) respectively. # Yields Rise as Banks Sold T-Bills to Meet Liquidity Demand