T-Bills Yield Hits 6.7%, Bonds 11.3% as Investors Sell Naira Assets
Sustained selloffs in the fixed income market helped the average yields on fixed income instruments chart an uptrend in the just concluded. However, there is an expectation that yield will rise further should Debt Management Office execute a higher borrowing plan in the local debt capital market in the second half.
Ahead of the midweek auction, the average yield on Nigerian Treasury Bills charted an uptrend to 6.7% last week while FGN Bonds inched up to 11.3% as a result of a bearish trading outing last week. The rising headline inflation rate has weakened investors’ returns on naira assets across financial markets generally.
FGN Bond and Treasury bill holders have continued to rebalance portfolios in expectation of fresh catalysts that will drive yield repricing further upward amidst an increase in interest rates.
A slew of fixed income analysts expects more local borrowings in the second half of 2022 as Nigeria’s finance minister said the nation has paused on Eurobond borrowings due to rising interest rates in the international debt capital market.
After a 150 basis points interest rate hike in May 2022, there has been an upward yield repricing in the fixed income market while the apex bank has been offering rather juicy rates at the OMO to attract foreign investors.
Last week, liquidity in the financial system declined further. The pressures of funding pushed local banks to dump their Treasury bills holding as the Central Bank of Nigeria Standing Lending Facility was faced with higher demand.
In a market report, Cordros Capital analysts said that the overnight rate printed at 14.0% while system liquidity closed the week in a net short position of N127.41 billion, from a net short position of N168.26 billion in the prior week.
Analysts said they expect the overnight rate to remain elevated this week as expected outflows for CBN’s auctions (NTB, FX & OMO) are likely to pressure the system further in the absence of any significant inflow into the financial system.
Bears dominated trading activities in the Nigerian Treasury Bills secondary market last week. Nigerian banks were seen selling their short-term investment securities in the space. The selloffs dragged that average yield across all instruments higher by 131 basis points to 6.7% on Friday. READ: Yields Rise as Sell Pressures Hit Bonds, T-Bills
Analysts at Cordros Capital attribute the bearish performance to the sustained sell-offs on short- and mid-dated bills as the dearth in liquidity persists. Across the segments, analysts’ market report detailed that the average yield expanded by 142 basis points and 98 basis points to 6.8% and 6.3% at the NTB and OMO secondary markets, respectively.
“We anticipate another liquidity squeeze, we expect T-bills yields to maintain their uptrend”, Cordros Capital projected in its market report. This week, the Central Bank of Nigeria is scheduled to hold a primary market auction for Treasury bills with N143.27 billion worth of maturities on offer, according to analysts’ note.
Due to the expectation that a primary market auction will be conducted midweek, analysts expect the secondary market to trade quiet as investors stay focused on spot rates pricing. In the FGN bonds segment, trading activities remained bearish as investors sold off positions across the curve in anticipation of an uptrend in bond market yield.
As a result, the average yield across all instruments inched higher by 11 basis points to 11.3%, analysts’ notes show. Analysts’ projection shows that yield will rise further over an expected increase in domestic borrowings to finance 2022 budget in the second half.
Across the benchmark curve, short (+34bps), mid (+4bps) and long (+5bps) dated instruments were at the brunt of the sell-offs as investors took profit off the APR-2023 (+98bps), FEB-2028 (+10bps), and APR-2049 (+16bps) bonds, respectively, according to Cordros Capital. #T-Bills Yield Hits 6.7%, Bonds 11.3% as Investors Sell Naira Assets
