FGN Bond Rally as Inflation Rate Stokes Further Pressure

FGN Bond Rally as Inflation Rate Stokes Further Pressure

The Federal Government of Nigeria (FGN) bond rally Thursday amidst mounting pressure from rising e headline inflation rate.

Again, inflation rate for September 2020 jerked up 49 basis points to 13.71%, further putting pressure on yields in the fixed income market.

Chapel Hill Denham said sentiments were bullish in the fixed income market as traders’ reacted to the dovish Nigerian Treasury Bills (NTB) primary auction yesterday, as well as buoyant system liquidity.FGN Bond Rally as Inflation Rate Stokes Further Pressure

At the front end of the curve, the NTB and open market operations (OMO) benchmark curves compressed by an average of 37 basis points and 7 basis point  to 1.09% and 1.60% respectively.

Similarly, FGN bonds rallied, as the benchmark bond yield curve compressed by an average of 45bps to a new low of 5.25%, driven by short (-8bps to 3.16%), mid (-76bps to 4.92%) and long (-42bps to 7.75%) term bonds.

“We expect risk appetite to strengthen tomorrow further tomorrow, following the publication of the Debt Management Office (DMO) bond auction circular for October”, analysts predicted.

In the circular, DMO revealed that FGN bond supply will be low at the monthly bond auction.

Notably, the DMO plans to supply only N30 billion, split between the 15Y MAR 2035 reopening (N15bn) and 25Y JUL 2045 reopening (N15bn).

“By our estimate, the DMO has already issued 93% of its planned domestic issuance, suggesting government supply of securities will remain thin for the rest of the year.

“Against the backdrop, we expect yields to compress further”, Chapel Hill Denham noted in a market note.

Also, interbank funding rates remained stuck at low single digits, thanks to buoyant liquidity in the financial system.

The financial system liquidity is further supported by OMO maturities estimated at N370 billion.

The Open Buy Back (OBB) and Overnight (OVN) rate dropped by 42bps and 46bps to 1.33% and 2.17% respectively.

Analysts are expecting funding pressures to remain benign tomorrow, barring a major Cash Reserve Requirement (CRR) debit by the central bank.

Read more: Bond Market Investors Raise Position on Short-term Instruments

FGN Bond Rally as Inflation Rate Stokes Further Pressure