Investors Focus Shift to Bond Auction on Prospect of Neutral MPC Outcome

Investors Focus Shift to Bond Auction on Prospect of Neutral MPC Outcome

Fixed income investors are expected to shift attention to the Debt Management Office bond auction this week as analysts stated expectation of a neutral position as the monetary policy committee (MPC) meeting begins.

Chapel Hill Denham in a note recalled that the fixed income market traded with a slight bullish bias last week.

Despite a major negative inflation surprise on Tuesday, analysts said bond yields compressed by an average of 9 basis points (bps) week on week to 7.28%.

Meanwhile, interbank funding rates were subdued within low single digits as funding pressures were benign, thanks to OMO maturities and series of bond coupon payments.

Chapel Hill said this reflected in the performance of short term rates, as the Nigerian Treasury Bills (NTB) and Open Market Operations (OMO) benchmark curves compressed by 11bps and 20bps to 1.62% and 2.29% respectively.

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At the NTB PMA, the DMO offered N158.7 billion to partly rollover N178.7 billion maturing bills. Subscription level was decent at N204.2 billion, implying a bid-to-cover ratio of 1.3x (2.0x previously).Investors Focus Shift to Bond Auction on Prospect of Neutral MPC Outcome

Meanwhile, analysts explained that the auction cleared lower by an average of 2bps to 1.88%.

The DMO allotted N2.0 billion of 91-day at 1.09% (-1bp), N8.39bn of 182-day at 1.50% (-5bps), and N148.36bn of 364-day at 3.05% (unchanged).

The August 2020 inflation data surprised to the upside, as headline inflation rate spiked by 40bps to a 29-month high of 13.22% from 12.82% in July, marking the 12th consecutive increase in inflation rate since the borders were closed in August 2019, and also the sharpest increase in inflation rate in four years.

Pressures in the CPI were broad-based, as food and core inflation spiked by 51bps and 42bps to 16.00% and 10.52% yoy.

Outlook is biased to the upside due to increase in fuel prices and electricity tariff“, Chapel Hill Denham analysts projected.

Analysts stated that weak foreign exchange liquidity and an underwhelming harvest season also remain upside risks to inflation.

We are currently tracking September inflation at 14%, and see a strong possibility of inflation rate touching 14.50% by year end“, Chapel Hill stated.

The investment firm hinted that this week, investors’ attention will be focused on the DMO bond auction holding on Wednesday and the MPC meeting between Monday and Tuesday.

The DMO plans to issue up to N145 billion at the auction, split between JAN 2026 (N25bn), MAR 2035 (N40bn), JUL 2045 (N40bn) and MAR 2050 (N40bn) bonds.

The previous auction closed at 6.7%, 9.35%, 9.75% and 9.90% respectively.

We expect a well bid auction, as liquidity remains supportive, with OMO maturities worth N300 billion and bond coupon payments of about N60 billion expected this week“, analysts said.

However, analyst said funding pressures may resurface on Friday due to settlement of the DMO bond auction and provisioning for FX auction.

We expect a neutral outcome at the MPC meeting, and project the MPR to be held at 12.50%, amid rising inflation expectation and a lingering FX liquidity challenge“, Chapel Hill Denham stated.

Investors Focus Shift to Bond Auction on Prospect of Neutral MPC Outcome

VIAJulius Alagbe
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