Stop Rate on 364-Day T-Bills Projected to Rise as CBN Holds PMA
Godwin Emefiele, CBN Governor

Stop Rate on 364-Day T-Bills Projected to Rise as CBN Holds PMA

Investors’ trade with cautious Tuesday with stop rate on 364-day instrument is projected to rise from 9% as the Central Bank of Nigeria (CBN) holds primary market auction Wednesday.

Analysts at Meristem Securities said while they expect investors to continue to demand better rates, the firm thinks the status quo would be maintained – with stop rates on the 91 and 182-day offers unchanged, and a slight uptick to stop rates on the 364-day instrument.

On Tuesday, the Nigerian Treasury Bills (NTB) rates closed flat at average of 4.23%, ahead of the scheduled CBN PMA as fixed income market traded with a bearish bias today, particularly in the bond market.

Chapel Hill Denham explained that at the front end of the curve, NTB and open market operations (OMO) benchmark curves closed flat at an average of 4.23% and 7.16% respectively.

“We saw more activity in the bond market as yields expanded by an average of 25 basis points (bps) to 12.67% across the benchmark curve, due to re-pricing at the short (+77bps to 11.21%) and intermediate (+3bps to 12.80%) and long (+9bps to 13.68%) end of the curve”, Chapel Hill Denham stated.

The Central Bank of Nigeria (CBN) will hold a Treasury Bills Primary Market Auction (PMA) where existing T-Bills worth N11.39 billion, N6.00 billion, and N71.07 billion across the 91-day, 182-day, and 364-day instruments, will mature, and will be rolled-over.

Outlook on Yields

Last week result at the PMA saw stop rates on the 91 and 182-day instruments unchanged from previous levels, while stop rates on the 1-year bill climbed by 100bps to 9.00%.

Notably, bids – that is, investor demand – were skewed in favor of the 364-day bill, with bid-to-cover ratio rising to 1.65x (from 1.37x at the previous auction).

In contrast, bid-to-cover ratios on the 91 and 182-day offers fell to 1.27x and 1.58x respectively (from 3.27x and 3.93x at the previous PMA).

“As we had earlier noted, the FG’s preference for the 364-day paper continued, with the Debt Management Office (DMO) finally allotting 2.69x (N132.12 billion) the initial offer size of N49.14 billion.

“This, in our view is symptomatic of sustained pressure on government finances, despite a relatively better oil price environment.

“As a downside, we note the more recent developments in the oil market, where concerns about demand recovery given a worsening coronavirus situation in India have precipitated a drop in crude oil prices”, Meristem Securities explained.

Broadly, the firm said the bullish sentiments have dominated the secondary market for T-bills since the last auction, with average yields retreating by about 43 bps to 3.61%, from 4.04% on the date of the previous auction.

According to analysts, this suggests that investors may have rushed to the secondary market to fill unmet demand from the PMA.

Read Also: Rates on Debt Instruments Surge as Liquidity Squeeze Persists

“The major challenge for most investors’ remains having to endure negative real rates of return, as headline inflation continues its ascent, having peaked at 18.17% in March.

“At the upcoming auction, although we expect investors to continue to demand better rates, we think the status quo would be maintained – with stop rates on the 91 and 182-day offers unchanged, and a slight uptick to stop rates on the 364-day instrument”, Meristem stated.

The Nigerian financial system liquidity remained constrained on Tuesday despite an additional bond coupon payment and OMO inflows.

It was noted that liquidity opened net short of N313.6 billion, up from a deficit of N274 billion yesterday, as a result, interbank funding rates increased.

The Open Buy Back and Overnight rates closed higher by 50bps apiece to 14.25% and 14.75% respectively.

“We expect funding pressures to ramp up towards the end of the week, due to the scheduled bi-weekly retail FX auction holding on Friday”, Chapel Hill Denham stated.

Stop Rate on 364-Day T-Bills Projected to Rise as CBN Holds PMA