Liquidity: Fixed Income Market Participants to Remain Buy-side Incline
Robust liquidity in the financial system will keep participants in the fixed income market to remain buy-side incline, some analysts have hinted.
The financial system liquidity opened substantially lower at N201 billion from N919 billion on Friday, due to series of debits by the Central Bank of Nigeria (CBN).
Nonetheless, funding pressures eased, as the Open Buy Back (OBB) and Overnight (OVN) rates fell by 378bps and 407bps to 1.92% and 2.33% respectively.
“We expect funding pressures to remain subdued throughout the week, partly supported by OMO maturity estimated at N243.77bn tomorrow, as well as anticipated net NTB maturity of N20 billion”, Chapel Hill Denham noted.
Vetiva Capital Management Limited specifically stated in its breakfast report that the firm expects participants in the fixed income space to remain buy–side inclined, primarily in the bonds space, due to current levels of system liquidity.
However, analysts noted that the fears over a second wave of the coronavirus could weigh on sentiment in the open market operations (OMO) segment, in given its impact on oil demand.
Sentiments remained broadly mixed in the fixed income market as duration apathy persisted due to sustained profit-taking.
This comes in reaction to the new National Pension Commission directive to Pension Fund Administrators (PFAs), instructing that bonds held-for-trading should be classified as variable income instruments.
Nonetheless, average yield on the benchmark bond curve closed flat at 4.12%, as the selloff at the long end of the curve (+6bps to 6.06%) was offset by positioning in short (-4bps to 1.71%) and intermediate (-2bps to 4.11%) bonds.
At the front end of the curve, Chapel Hill Denham highlighted that average discount rate on benchmark Nigerian Treasury Bills closed flat at 0.55%, while the OMO curve eased further by 4bps to 0.20%.
Although the borrowing target (for November and December) announced by DMO last week surprised to the upside, analysts at Chapel Hill Denham said they expect bonds to remain defensive in the near term.
Analysts attribute this view to subsisting robust liquidity in the financial system, and substantial OMO maturities worth N243.77 billion expected on Tuesday with no meaningful net issuance scheduled to mop-up the liquidity.
In addition, Chapel Hill Denham stated that very few PFAs are in breach of the regulatory cap on variable income instruments, even after adjusting for the new directive from PENCOM.
A rollover NTB auction is scheduled for Wednesday. Based on the calendar, the DMO is expected to offer N147.8 billion compared to N167.82 billion maturing.
This offer will be split between the 91-day (N19.78bn), 182-day (N40.09bn) and 364-day (N87.94bn) tenors.
“We expect the auction to clear at sub-1% level”, analysts at Chapel Hill Denham.
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Liquidity: Fixed Income Market Participants to Remain Buy-side Incline
