Bond Auction: Budget Deficit Funding Size to Push Rates Higher –Analysts
Sizeable budget deficit financing need is expected to push marginal rates higher in the Nigeria’s debt market, analysts at Chapel Hill Denham has hinted in market report.
In the fixed income market, sentiments remained broadly mixed as investors remained cautious ahead of the bond Primary Market Auction (PMA) holding on Wednesday.
At the front end of the curve, the Nigerian Treasury Bill (NTB) and Open Market Operations (OMO) benchmark curves eased by an average of 8 basis points (bps) and 9bps to 0.39% and 0.73% respectively.
Similarly, in the bond segment, benchmark bond yield curve expanded by an average of 8 bps to 7.04%.
This was driven by upward repricing of short (+9bps to 3.94%) and intermediate (+19bps to 7.93%) yields.
In the Primary Market Auction (PMA) on Wednesday, the Debt Management office (DMO) is expected to offer a total of N150 billion.
However, analysts said the offer will be split equally (N50 billion) amongst three tenors (MAR 2027, MAR 2035, and JUL 2045).
“While liquidity should remain buoyant this week, we expect risk-averse investors to wait on the side-lines given the uncertainty in the market.
“The DMO will likely mount a resistance against investors demanding for higher yields, but unlikely to be successful, given the sizeable deficit financing needs in the 2021 budget”, Chapel Hill Denham stated.
Budget 2021 deficit is estimated at N4.7 trillion and analysts are ruling out possibility of Eurobond visits at market is awash with liquidity.
As a result, Chapel Hill Denham expectation is that marginal rates will close substantially higher at +100bps at the minimum.
Today, funding pressures were broadly benign, as financial system liquidity opened higher at N374.6 billion from N242.9 billion previously.
Consequently, the Open Buy Back (OBB) rate closed flat at 0.50% while the Overnight (OVN) rate eased by 17bps to 0.83%.
Analysts said they expect liquidity to remain buoyant this week, supported by OMO maturities (N226bn) and bond coupon payments (N94.94bn).
In the currency market, the Naira appreciated against the United States dollar at the investors & Exporters Window by 0.21% or 84 kobo at N394.67.
However, the Naira traded flat against the greenback in the parallel market, exchanged for N475.00.
Last week, the foreign exchange rate remained unchanged at N379.00 and N380.69 at the official and SMIS windows, respectively.
In the I&E window and parallel market, however, the Naira depreciated against the dollar by 0.30% (-N1.17) and 0.63% week on week (-3.00) respectively to N394.67 and N475.00 respectively.
Average daily turnover in the I&E Window rose by 79.4% week on week to US$74.20 million.
Notably, data from the I&E window also shows that the Naira traded as low as N414.76 on Friday, its lowest level Year-to-Date.
“We also highlight that Nigeria’s external reserves sustained uptrend in the new year, rising by 2.6% month-to-date to US$36.30bn as at 14 January 2021, likely reflecting the impact of the recently approved US1.5bn World Bank loan to Nigeria and US$1bn Swap deal with the Bank of Industry (BOI)”, Chapel Hill Denham stated.
In the New Year, analysts at Chapel Hill Denham expect pressures on the Naira to ease due to a combination of improving oil prices and production, and strong possibility of substantial foreign currency borrowing.
It is believed that these should help bolster foreign exchange reserves, and boost the CBN’s ability to defend the naira.
“However, we think further adjustments are needed in 2021 for liquidity to return to the I&E Window”, Chapel Hill Denham insists.
Last week, the bearish sentiments in Nigeria’s fixed income market continued as investors remained apprehensive on the direction of monetary policy.
Notably, bond yields expanded by an average of 33bps across the benchmark curve to 6.97%.
Front end rates were mixed, with the benchmark NTB curve expanding by 7bps wow to 0.51%, while the OMO curve eased by 38bps to 0.82%.
Primary market activity had resumed with a rollover NTB auction as the CBN, on behalf of the DMO, offered N232.36 billion.
Analysts believed that subscription level was decent at N286.13 billion, implying a bid-cover ratio of 1.23x.
However, the CBN only allotted N107.22 billion, in defiance to investors who demanded for higher yields.
Nonetheless, stop rates expanded by an average of 42bps to 1.00%, as the 91-day (+47bps to 0.500%), 182-day (+50bps to 1.00%) and 364-day (+29bps to 1.50%) bills cleared higher.
On Friday, the National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for December 2020.
The report showed headline inflation rate surged by 87 bps to a 37-month high of 15.75% year on year, from 14.89% in November.
Read Also: Yield on Treasury Bills Stands Down as Bond Rally ahead of DMO Auction
Pressures were broad-based, although food inflation remained the pressure point, rising by 126bps to a 37-month high of 19.56%.
Core inflation also came under pressure, rising by 32bps to a 34-month high of 11.37% year on year.
“We expect pressures to remain elevated in the near term, due to second round effects of higher electricity tariffs, elevated food prices towards the planting season, and low base effect.
“We expect headline inflation rate to cross 16% in Q1-2021, but likely to subside in H2-2021 on better harvest and base effect”, Chapel Hill Denham said.
Bond Auction: Budget Deficit Funding Size to Push Rates Higher –Analysts
