Inflation Slowdown to Ruffle Treasury Yield in Q3-2021

Inflation Slowdown to Ruffle Treasury Yield in Q3-2021

Inflation rate slowdown will ruffle treasury yield adjustment in the third quarter of 2021, according to some analysts at MarketForces Africa forum while noting the impact of financial system liquidity. Meanwhile, liquidity pressure eased further during the week due to significant inflow into the financial system.

The fixed income market witnessed a slide in the headline inflation rate during the week just as there were strong financial system liquidity boosts, setting yield direction in the coming week as investors position for higher returns.

For the third consecutive month, the headline inflation rate declined to 17.75% in June 2021 from 17.93 in May, shedding 18 basis points on the back of slight moderation in the food index.

The disinflation trend would set a dovish agenda for Central Bank in the next monetary policy committee meeting due to the inherent belief that the initial trend was driven by a supply shock.

MarketForces Africa gathered that slowdown in headline inflation could prove the CBN leadership right for now, though the decline is due to lower base effects.

Meanwhile, interbank rates jerked down as inflows from the maturing JUL-2021 bond worth N561.05 billion, FGN bond coupon payments at N40.68 billion and OMO maturities of N10.00 billion.

This flooded the financial system with liquidity which analysts said outweighed funding pressures for net Nigerian Treasury Bill issuances of N40.45 billion and CBN’s weekly auctions of N20.00 billion- both foreign exchange and open market operations.

Consequently, the overnight rate dipped by 15.75 percentage points week on week to 4.8% from the high double-digits level driven by liquidity pressure in June.

“In the coming week, we expect the CBN to mop up the extra liquidity in the market. Thus, we envisage an expansion in the overnight lending rate to the double-digit region”, Cordros analysts said in a report.

Trading in the Treasury bills secondary market was bullish investors witnessed a contraction in average yield across all instruments, falling 30 basis points to 8.1%.

Cordros Capital told clients via an email that the slide came following an improvement record in the financial system liquidity during the week.

Analysts said average yield at the open market operations (OMO) segment contracted by 57 basis points to 9.3% across the market, given improved demand for these higher-yielding bills.

During the week, Cordros Capital analysts said the Central Bank of Nigeria (CBN) sold NGN20.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions.

Inflation Slowdown to Ruffle Treasury Yield in Q3-2021

Similarly, the average yield at the Nigerian Treasury bill segment contracted by 5 basis points to 6.7%.

Cordros Capital told clients that the contraction in treasury space mirrors declines in the primary market and as participants sought to cover lost auction bids in the secondary market.

On Wednesday at its bi-weekly primary market auction (PMA), the CBN offered N109.52 billion for sale and eventually allotted N150.00 billion – NGN5.24 billion of the 91-day, N7.60 billion of the 182-Day and N137.30 billion of the 364-day bills with stop rates of 2.50% (previously 2.50%), 3.50% (previously 3.50%), and 8.67% (previously 9.15%), respectively.

The subscription level was significant, settled at N574.68 billion with a bid cover ratio of 3.8x against 2.7x reported in the prior auction.  

“We highlight that this was the most subscribed auction this year”, Cordros Capital said in its market report

Despite the slowdown inflation rate, analysts said in the coming week, they expect yields to trend higher on the expectation that there will be a shortfall in system liquidity.


Also, bearish sentiments persisted in the Treasury bonds secondary market as investors’ cherry-picked instruments across the curve.  Specifically, average yields expanded by 50 basis points to 12.2%.

Across the benchmark curve, analysts said they observed duration apathy as average yield contracted at the short (-88bps) end following demand for the JUL-2021 (-382bps).

Meanwhile, yield expanded at the mid (+11bps) and long (+39bps) segments following an upward re-pricing in the JUL-2030 (+20bps) and JUL-2034 (+79bps) bonds, respectively.

“Next week, we expect the outcome of the bond auction to influence the direction of yields in the bonds secondary market”, Cordros Capital informed.

At the auction, the Debt Management Office will be offering instruments worth about N150.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.40% FGN MAR 2036 and 12.98% FGN MAR 2050 bonds.

Inflation Slowdown to Ruffle Treasury Yield in Q3-2021

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