Bond Yield Dips 17bps, Sell Pressures Hit T-Bills
The average yield on Federal Government of Nigeria (FGN) bonds dipped by seventeen basis points (17bps) on Friday as investors take an early position in anticipation that yield would decline further.
However, while the bond space ended on a bullish note, the reverse was the case in the Treasury bills market where sell pressures lifted average yield across the curve upward. MarketForces Africa reported that the Central Bank of Nigeria conducted an open market operation (OMO Bills) auction where spot rates were steady across tenored.
This was in stark contrast with development in the Nigerian Treasury bills primary market auctions where spot prices have been dropping persistently following rising demand for mid and long dated tenored instruments.
Healthy liquidity in the financial system continues to affect spot pricing as there are limited risk-free alternatives – especially for key players including pension fund administrators.
In the money market, liquidity position strained at the weekend due to funding pressures driven by an outflow of funds or rather debits on the financial system. The overnight lending rate contracted by 883 basis points this week to 5.0%, Cordros Capital said in a market note.
This was driven by a healthy system liquidity position from last week coupled with this week’s inflow from OMO maturities at N106.22 billion outweighed N142.53 billion debits for net NTB issuances, N40 billion OMO and FX auctions.
“We expect improved system liquidity as inflows from FGN bond coupon payments worth N142.09 billion and OMO maturities worth N105.00 billion are likely to offset funding pressures for CBN’s auctions. Thus, we expect the OVN to trend downwards”, Cordros said in its note.
Trading in the Treasury bills secondary market reversed the recent demand trend and closed on a bearish note this week, largely driven by the expiration of actively traded OMO instruments.
Consequently, the average yield across all instruments expanded by 7 basis points to 3.5%. Across the market segments, the average yield expanded by 61bps to 3.9% at the OMO segment.
On Thursday, the CBN offered and allotted N40.00 billion worth of OMO bills to participants and maintained stop rates across the three tenors: 96 day to maturity at the spot rate of 7.0%, 187 day to maturity at the spot rate of 8.5% and 362 day to maturity at the spot rate of 10.1%.
The spot rates across the tenored were unchanged from the previous auction, according to the CBN auction result, also cited by a slew of fixed income traders. Elsewhere, the average yield at the NTB segment was unchanged at 3.4%.
At Wednesday’s Nigerian Treasury Bills auction, the CBN offered N94.00 billion for sale and recorded significant demand with a total subscription amount of N482.90 billion (bid-to-offer ratio: 5.1x).
Eventually, the CBN allotted N2.32 billion of the 91-day, N21.29 billion of the 182-day and N212.92 billion of the 364-day bills – at respective stop rates of 1.75% (previously 2.24%), 3.28% (previously 3.30%), and 4.10% (previously 4.35%).
“We expect the outcome of the Nigerian Treasury Bills auction to shape the direction of yields in the T-bills market”, traders at Cordros Capital projected. In the coming week, the CBN is set to roll over N58.04 billion worth of maturities to market participants at the auction.
Activities at the FGN bond secondary market sustained its bullish trading this week, as fixed income investors and market traders continued to take positions in attractive instruments ahead of further anticipated yield declines.
Accordingly, the average yield contracted by 17 basis points to 10.4% due to increased demand for the instruments. Across the benchmark curve, the average yield declined at the short (-22bps), mid (-27bps) and long (-8bps) segments as investors demanded the APR-2023 (-154bps), JUL-2034 (-45bps) and MAR-2036 (-33bps) bonds, respectively.
Traders at Cordros Capital said they envisage the reinvestment of coupon payments will support demand from investors and push yields lower next week.
Nonetheless, they said in the note that they are maintaining their medium-term view that the FG’s significant frontloading of borrowings for the year in H1-2022 will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.
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