Sell Pressure, Assets Repricing Drive Bonds, T-Bills Yields Up
The average yields on fixed income securities see a sharp rise as investors began to renegotiate spot prices on government issuances amidst a running inflation rate and weak exchange rate.
Last week, there were sell pressures in the fixed income market following tight liquidity in the financial system. Some local banks were noted to offload their treasury instruments to meet liquidity requirements.
In the money market, the overnight lending rate expanded by 100 basis points to 15.0%. The uptick, according to Cordros Capital analysts, was attributed to strained system liquidity.
Cordros Capital said in its report that liquidity was further pressured by N123.85 billion debits for FGN bonds and FX auctions amid inflows from FGN bond coupon payments worth N181.96 billion and OMO maturities of N10.00 billion.
“We expect system liquidity to remain tight as the expected inflows worth a combined N81.01 billion from FGN bond coupon payment (N51.01 billion) and OMO maturities (N30.00 billion) may not be sufficient to saturate the system and outweigh next week’s outflows”.
In the secondary market for Nigerian Treasury bills, investors sustained last week’s bearish sentiments following the unhealthy liquidity in the system, analysts wrote.
As a result, the average yield across all instruments expanded by 66 basis points to 7.7%. Across the segments, Cordros Capital said the average yield increased by 158 basis points and 35 basis points to 8.9% and 7.3% at the OMO and Treasury bills secondary markets, respectively.
Following the lower inflows expected in the system in the new week, analysts said they expect a low demand for T-bills and a slight expansion in yields from current levels.
“We expect market focus to be shifted to the Nigerian Treasury bills primary market auction holding midweek, with the CBN expected to roll over N264.28 billion worth of instruments”, Cordros Capital said.
Elsewhere, proceeding in the FGN bond market closed on a bearish note as sell pressure greeted the local debt capital market. Analysts said the bears continued to dominate the secondary market for Bonds as the average yield across instruments expanded by 38 basis points to 11.9%.
“We attribute the bearish sentiment to investors re-pricing bonds in reaction to the monetary policy committee (MPC) interest rate hike…” Cordros Capital said. READ: T-Bill Records Upward Yield Repricing as Naira Falls
Across the benchmark curve, analysts note stated that the short (+89bps), mid (+9bps), and long (+14bps) instruments bore the impact of the sell-offs. In the trading session, fixed income investors took profits off the MAR-2024 (-184bps), NOV-2029 (+37bps), and APR-2049 (+38bps) bonds, respectively.
At this month’s bond PMA, the DMO offered instruments worth N225.00 billion to investors through re-openings of the 13.53% MAR 2025 bond at a stop rate of 11.0%, 12.50% APR 2032 at a stop rate of 13.0 and 13.00% JAN 2042 at a stop rate of 13.75%.
Demand was relatively low, according to the auction results, at a subscription level of N142.29 billion, translating to a bid-to-offer ratio of 0.6x as against 2.5x bid-to-offer in the previous auction. The DMO eventually allotted instruments worth N123.84 billion, resulting in a bid-to-cover ratio of 1.2x.
Analysts at Cordros Capital maintained a view of an uptick in bond yields in the medium term, as both the FGN’s borrowing plan for 2022 and expected fiscal deficit point towards an elevated supply. #Sell Pressure, Assets Repricing Drive Bonds, T-Bills Yields Up