Bonds, Treasury Bills Yields Fall as DMO Seeks Reduced Borrowing Costs
Patience Oniha, Director-General. Debt Management Office

Bonds, Treasury Bills Yields Fall as DMO Seeks Reduced Borrowing Costs

Average yields on Federal Government bonds and Nigerian Treasury Bills continue to slow down on deliberate efforts of the Debt Management Office (DMO), the Central Bank (CBN) to reduce borrowing costs amidst pressure in the financial system liquidity.

Investors in the fixed income market have been earning negative returns, with yields on instruments trending below the average inflation rate and a low-interest-rate environment. This has reduced Nigerian banks’ investment income while CBN placed a ban on individuals from participating in the OMO auction.

Limited instrument issuance has supported the reduction in rates across markets, both CBN and DMO have been recording declining spot rates due to higher subscription levels at primary market auctions as investors seek returns.

A slew of analysts believes the financial repression will end as the United States Federal Reserve bond-buying program gathered momentum amidst inflation worries and stock market rout.

Due to the strong outflow recorded this week, pressures mounted at the money market space as open buyback and the overnight lending rate increased. The overnight rate expanded by 658 basis points this week against the previous to 23.8%, according to a market report from Cordros Capital Limited.

The liquidity squeeze was however driven by cash reserves ration debits on banks for failing to meet the Central Bank’s 65% loan to deposit ratio. In addition, the Federal Government bond auction worth N260.09 billion outweighed N89 billion inflows from open market operations (OMO) maturities.

Next week, analysts at Cordros Capital envisage improved system liquidity following expected inflows from Federation Account Allocated Committee’s disbursements, N157.27 billion OMO maturities and N49.89 billion from bond coupon payments – all of which should limit the impact of outflows for CBN’s primary market and FX auctions.

Amidst quiet trading sessions in the fixed income market, bullish sentiments persisted in Treasury bills secondary market following sustained demand for OMO instruments, which analysts attributed to the absence of renewed primary market supply by the CBN.

Thus, the average yield across all instruments contracted by 88 basis points to close the week at 5.4%. Across the market segments, analysts report shows that the average yield at the OMO segment declined by 171 basis points to 6.0%.

Similarly, the average yield at the Nigerian Treasury Bill segment pared by 2 basis points to 4.7% on Friday following a series of seesaw outturns during the week.

In the first few trading days, Cordros Capital analysts are expecting quiet trading as the CBN is set to roll over N157.20 billion worth of maturities to market participants at its bi-weekly primary market auction.

Afterwards, analysts said they envisage the trend of lower yields on T-bills to continue as market participants take positions due to expectations of further decline in auction stop rates amidst the CBN’s continued absence from the OMO primary market.

Following a weak market performance, trading in the bonds secondary market also closed the week on a bullish note as investors sought to fill lost bids from Wednesday’s bond auction, according to analysts.

Specifically, the average yield declined by 17 basis points to 11.4%. Cordros said across the benchmark curve, the average yield declined at the short (-5bps), mid (-41bps) and long (-7bps) ends following demand for the MAR-2024 (-39bps), MAR-2027 (-77bps) and MAR-2036 (-21bps) bonds, respectively.

At the bond auction, the DMO offered instruments worth N150.00 billion to investors through re-openings of the 13.9800% FGN FEB 2028.  As expected, demand was higher as investors demand more than twice the offer (bid-to-offer: 2.4x). The DMO eventually over-allotted instruments worth N260.09 billion, resulting in a bid-to-cover ratio of 1.4x.

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Bonds, Treasury Bills Yields Fall as DMO Seeks Reduced Borrowing Costs