Bonds, T-Bills Yields Soften as Investors Seek Non-Sovereign Instruments
The fixed income market ends the week like a pendulum swings as yields move both ways in the last five trading sessions. However, analysts projected that liquidity will start chasing non-sovereign instruments on the expectation that yields will oscillate around current levels.
MarketForces Africa reports that trading activities in the fixed income market have been eventful this week as both the Central bank of Nigeria and the Debt Management Office conducted their primary market auctions.
Spot rates on 91-day and 364-day treasury bills were reduced at the Central Bank primary market auction while DMO sees a strong demand level at the bonds auction.
The financial system liquidity had stayed healthy but there was a strain on Friday. Short term interest rate increase, a resultant effect of strained liquidity, though some analysts say the unease is still moderate.
On Friday, the Overnight rate increased by 125 basis points to close at 11.75 per cent as against the last close of 10.50 per cent Also, the Open Repo (OPR) rate also increased in like manner, up 125 basis points to close at 11.25 per cent compared to 10.00 per cent on the previous day.
Compare with the previous week, the overnight rate contracted by 600 basis points as the healthy system liquidity position brought forward from last week.
There was supporting inflow from Open Market Operations (OMO Bills) maturities of N40.00 billion, which helped offset funding pressures for the December FGN worth N98.80 billion and CBN weekly FX auctions, according to Cordros Capital note.
In the treasury bills secondary market, trading activities closed on a flat note with the average yield across the curve closing flat at 4.48 per cent. According to separate analysts notes, average yields across short-term and medium-term maturities closed flat at 3.39 per cent and 3.98 per cent, respectively.
However, the average yield across the long-term maturities declined by 1 basis point.
“We envisage that lower yields on T-bills would persist following expected improved buying activities in reaction to the lower rates on recently (re)issued bills”, Cordros Analysts projected.
In the OMO bills market, the average yield across the curve decreased by 1 basis point to close at 5.45 per cent as against the last close of 5.46 per cent.
Average yield across the short-term, medium-term, and long-term maturities declined by 1 basis point each, FSDH Capital note shows.
FGN bonds secondary market also traded on a mixed note, although with a bullish bias, as investors remained on the sidelines but continued to cherry-pick instruments across the curve.
Consequently, the average bond yield across the curve closed flat at 8.11 per cent. FSDH Capital note indicated that average yields across short tenor, medium tenor, and long tenor of the curve closed flat.
Across the benchmark curve, the average yield contracted at the short (-11bps) end as investors increased their demand for the APR-2023 (-58bps) bond.
However, average yield expanded at the mid (+1bp) and long (+3bps) segments following sell pressures on the JUL-2030 (+3bps) and APR-2037 (+19bps) bonds, respectively.
At the bond auction, the DMO offered instruments worth N100.00 billion to investors through re-openings of the 12.5000% FGN JAN 2026 with a Bid-to-offer: 10.5x; while its stop rate was unchanged at 11.65%.
Also, 16.2499% FGN APR 2037 bonds saw a Bid-to-offer ratio of 2.1x; while the stop rate settled at 13.10% from 12.95%.
Despite the significant level of demand with a total subscription of N132.61 billion on a bid-to-offer ratio of 1.3x, the DMO eventually under-allotted instruments worth N98.80 billion, resulting in a bid-to-cover ratio of 1.3x.
“In the short term, we expect yields to oscillate around current levels, driven by thin maturities and deliberate efforts by the DMO to reduce domestic borrowing costs for the government.
“Also, we expect non-bank liquidity to be geared towards relatively higher non-sovereign instruments, thus tempering demand”, Cordros Capital said in a note.
In the secondary market, FSDH Capital said the FGNSB 14-MAY-2023 bond was the best performer with a decrease in the yield of 9 basis points, while the FGNSB 11-MAR-2022 bond was the worst performer with an increase in yield of 31 basis points.
Going into next week, FSDH Capital predict that the secondary bond market is likely to remain subdued in the short term as investors are expected to focus on the ongoing issuance of Sukuk bonds. #Bonds, T-Bills Yields Soften as Investors Seek Non-Sovereign Instruments
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