Bond Auction, Inflation rate to Shape Yields Direction –Analysts
Yields on fixed income instruments end mixed in the just concluded week as traders projected that outcome of the Federal Government bond auction and inflation reading for January would shape market sentiment next week.
Next week, Debt Management Office (DMO) is scheduled to hold a primary market auction for the Federal Government of Nigeria’s N150 billion bonds issuance. Also, the National Bureau of Statistics (NBS) will release the headline inflation rate figure for January 2022.
In December, Nigeria recorded an increase in the consumer price index to 15.63%, 23 basis points above 15.40% in November 2021. In the money market, short term interest rates witnessed pressures as the financial system liquidity became strained.
The average interbank rate surged due to pressures on overnight and open buy back rates. Data from the FMDQ Exchange shows that the overnight lending rate increased by 250 basis points to close at 4.00 per cent as against the last close of 1.50 per cent.
Also, the Open Repo (OPR) rate increased by 217 basis points to close at 3.33 per cent compared to 1.16 per cent on the previous day.
When compared with the previous week, the overnight rate declined by 925 basis points to 4.0%, as inflows from maturing FX swap contracts and OMO bills (NGN139.14 billion) outweighed funding pressures.
Putting pressures on the financial system liquidity position, Outflow recorded include N116.95 billion NTB issuances, and N80 billion CBN’s weekly OMO and FX auctions.
Next week, OMO bill worth N140 billion will flood the financial system but the impact will be doused by expected cash reserve ratio debits on banks, outflow for FGN bonds and CBN auction.
The Treasury bills secondary market ended the trading week on a bullish note, following the improved system liquidity supporting demand, moderations in the 1-year paper stop rate at Wednesday’s NTB PMA and market participants’ movement to the secondary market in a bid to fill lost auction bids.
Thus, the average yield across the curve remains unchanged at 4.43 per cent. According to traders at FSDH Capital, the average yields across short-term, medium-term, and long-term maturities remained unchanged at 3.69 per cent, 4.24 per cent, and 5.35 per cent, respectively.
In the OMO bills market, the average yield across the curve closed flat at 5.67 per cent, according to a note from FSDH Capital Limited. Analysts stated that the average yields across short-term and long-term maturities remained unchanged at 5.41 per cent and 5.80 per cent, respectively.
The CBN held an OMO auction last week where it sold bills worth ₦80.00 billion across the 96-day (₦20.00 billion), 187-day (₦20.00 billion), and 362-day (₦40.00 billion) tenors.
The stop rates on OMO bills were unchanged at 7.00 per cent, 8.50 per cent, and 10.10 per cent, respectively, analysts said, citing auction results.
The auction was oversubscribed, indicating a subscription level of 548 per cent (₦438.33 billion). Demand was skewed towards long tenor maturity bills with bid-to-cover ratios settling at 3.64x (96-day), 4.69x (187-day), and 6.79x (362-day).
“We expect yields to trend marginally higher in the coming week as we expect a shortfall in system liquidity”, analysts at Cordros Capital projected. Read: Foreign Investors Buy More OMO Bills, Auction to Shape T-Bills Yield
FGN bonds secondary market continued with mixed sentiments, albeit with a bullish tilt, following the persistently lower demand as investors remain on the sidelines awaiting further clarity on the direction of fixed income yields.
As a result, the average bond yield across the curve cleared lower by 1 basis point to close at 11.50 per cent from 11.51 per cent on the previous day, according to FSDH Capital Limited traders note.
Across the benchmark curve, the average yield declined at the short (-17bps) and long (-2bps) ends following demand for the MAR-2024 (-44bps) and MAR-2035 (-11bps) bonds, respectively but expanded at the mid (+3bps) segment as investors sold off the FEB-2028 (+22bps) bonds.
Next week, analysts are expecting the outcome of the bond auction and release of the January 2022 consumer price index to shape market sentiments and the direction of yields.
At the auction, the DMO will be offering instruments worth N150.00 billion through re-openings of the 12.50% FGN JAN 2026 and 13.00% FGN JAN 2042 bonds.
In the medium term, Cordros Capital expects frontloading of significant borrowings for the year by the FG to result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply. #Bond Auction, Inflation rate to Shape Yields Direction –Analysts
