Bond Market Reacts to Rate Cut as Yields Plunge to New Low
The Nigerian Bond market react to rate cut as yields on government securities plunged to a new low, according to Chapel Hill Denham’s fixed income market report.
The firm stated that the Nigerian fixed income market traded with a bullish bias last week, on the back of the surprising dovish outcome of the September MPC meeting, as well as bullish outcome of the Debt Management Office (DMO) monthly bond auction which held the following day.
Specifically, yields on benchmark bonds compressed by an average of 51 basis points (bps) week on week to a new low of 6.77% on Friday.
Also, interbank funding pressures were broadly benign last week, supported by Open Market Operations (OMO) maturities worth N300 billion and a bond coupon payment.
Notwithstanding, Chapel Hill Denham stated that sentiments on short term rates were mixed, as benchmark Nigerian Treasury Bills (NTBs) expanded by an average of 15 bps week on wee to 1.77%, while OMOs compressed by 25 bps to 2.03%.
Contrary to consensus expectation of a status quo outcome, the MPC meeting of the CBN ended with a very dovish outcome.#
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For the second time in 2020, the MPC eased its benchmark Monetary Policy Rate (MPR) by 100bps, to a 4-year low of 11.50%.
Also, the MPC lowered the discount window rates, by adjusting the asymmetric corridor around the MPC to +100bps/-700bps from +200bps/-500bps.
Analysts said the CBN’s decisions effectively reinforced its pro-growth stance of supporting households and businesses against the COVID-19 shock, while relegating the importance of its primary mandate of FX and price stability.
Meanwhile, the bond market reacted swiftly to the MPC’s surprise rate cut.
At the bond auction that followed on Wednesday, the DMO cut marginal rates by an average of 84bps to 8.09% as debt office took a passive stance to ensure lower marginal rates.
As a result, the DMO sold N103.81 billion at the auction, allotting N66.97 billion of JAN-26 at 6.00% (-70bps), N25.43 billion of MAR-35 at 8.52% (-83bps), N6.81 billion of JUL-45 at 8.90% (-85bps), and N4.6 billion of MAR-50 at 8.94% (-96bps).
In the short term, analysts at Chapel Hill Denham said they expect the supportive liquidity backdrop and reactions to the MPC’s dovish policy bias to continue to support further compression in yields.
However, over the medium term, Chapel Hill stated that liquidity factors are expected to play a greater role in determining the direction of fixed income yields, with an inflection point likely to come in Q1-2021, once OMO maturities fuelling the fixed income rally begin to subside.
Meanwhile, Treasury Bills auction is scheduled for Wednesday as the DMO is set to offer N113.97 billion to partly rollover maturing bills worth N134 billion.
“We expect a well bid auction, given the liquidity glut in the money market, supported by bond coupon payments on today and OMO maturities estimated at N133.97 billion”, Chapel Hill Denham stated.
Bond Market Reacts to Rate Cut as Yields Plunge to New Low
