Bonds: Yields across Benchmark Tenors Drop as Inflation hits 28-month high
In the bond market, yields across benchmark tenors moderated two basis points (bps) to an average of 7.69% Monday due to increased interest at the short end of the curve, offset flattish long term bonds.
The moderation recorded is coming at the time when Nigeria’s headline inflation rate surge to 12.82%, which is significantly above a number of analysts’ projections for the month of July.
Chapel Hill Denham in a note explained that despite rising inflation, the bond market traded bullish on Monday.
The firm stated that financial funding pressures remained elevated as financial system liquidity opened lower at N88.9bn from N510bn last week Friday.
As such interbank funding rates remained in double-digits.
The Open Buy Back (OBB) and Overnight (OVN) rates eased by 120bps and 230bps to 16.40% yoy and 17.50% yoy, respectively.
Meanwhile, the fixed income market traded with a slight bullish bias, as investors remained cautious ahead of the bond primary market auction holding on Wednesday.
At the front end of the curve, analyst said the OMO benchmark curve was unchanged at 3.85%.
Meanwhile discount rates on Nigerian Treasury Bills (NTBs) compressed by 27bps to 1.62%.
National Bureau of Statistics (NBS) published the Consumer Price Index (CPI) report for July 2020, which showed inflationary pressures accelerated for the 11th consecutive month.
Notably, headline inflation rate increased by 26bps to hit a 28-month high of 12.82% year on year from 12.56% in June 2020.
Chapel Hill said the inflation print was a negative surprise, as it surpassed its estimate of 12.66%.
The higher inflation print was mainly against the backdrop of sustained pressures in the food basket, despite the commencement of early harvest, while core inflation was relatively benign.
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Analysts maintained that outlook biased to the upside due to supply side factors.
Chapel Hill said it is currently tracking August headline inflation rate at 12.94% year on year.
The firm said investors’ attention will likely remain focused on the bond auction holding on Wednesday.
MarketForces reported that the Debt Management Office (DMO) is scheduled to offer N150bn: N25bn of JAN 2026, N40bn of MAR 2035, N45bn of JUL 2045, and N40bn of MAR 2050.
The last auction cleared at 6.0%, 9.5%, 9.8% and 9.95% respectively.
“Given the large upcoming OMO maturity on Thursday (N181.4bn), odds are in favour of another well-bid primary market auction (PMA)”, Chapel Hill Denham stated.