Treasury Yields Rise as CBN Debits on Banks Stress Liquidity
Nigerian Treasury bills yields rise as the Central Bank (CBN) debits on banks for failing to meet cash reserve requirements strained the financial system liquidity in the just concluded week.
Average yield inched upward as the nation’s headline inflation rate slowed down to 17.01%, 37 basis points lower than the 17.38% print in July 2021. As investors await catalysts to drive higher returns, the monetary policy committee maintains the status quo with a benchmark interest rate at 11.50% with all other parameters unchanged.
Due to the market dynamics, analysts have projected an upward yield repricing for this week on the back of the prevailing bearish trends in the fixed income market, and the expectation that liquidity pressure will persist in the financial system.
Data from the FMDQ platform showed the liquidity strained put pressure on interbank rates which witnessed a double-digit increase after short term rates had dropped persistently to lower single-digit earlier in the month.
Open buy back closed the week at 16.50%
Similarly, the overnight (OVN) rate expanded by 325 basis points week on week to 17.8% as Cordros Capital analysts spotted that funding pressures for cash reserves requirement debits, CBN’s weekly OMO and FX auctions outweighed inflows from Federal Government bond coupon payments and OMO maturities.
Apart from CRR debits, N20 billion open market operations outflow was recorded. This comes in addition to outflow for foreign exchange auctions. There was an inflow of N110.67 billion from the Federal Government of Nigeria bond coupon payments as well as OMO maturities worth N38 billion.
Analysts at Cordros Capital expect the overnight lending rate to remain elevated following system debits for the September FGN bond auction and CBN’s weekly auctions, which are likely to offset the sole N59.54 billion inflow from FGN bond coupon payments.
In the fixed income space, analysts said bearish sentiments persisted in the Treasury bills secondary market, in the absence of bids to support the increased supply following the two consecutive weeks of primary market auctions.
Thus, the average yield expanded by 39 basis points to 6.0%. Cordros analysts hinted in the report that across the market segments, the average yield expanded by 12 and 66 basis points to 6.3% and 5.6% at the open market operations and Nigerian treasury bills segments, respectively.
In the primary market auction conducted by the CBN last week, the apex bank offered and eventually allotted bills worth N155.88 billion – N0.96 billion of the 91-day, N3.61 billion of the 182-day and N151.31 billion of the 364D bills.
The spot rates on these bills were unchanged from the previous auction at 2.50%, 3.50%, and 7.20% as analysts said there was no overallocation at this auction despite the significant demand recorded.
Subscription level valued at N244.57 billion; translating to a bid-to-offer ratio of 1.6x was recorded at the weekly auction conducted by the CBN last week.
“Considering the expected strain on system liquidity and the prevailing bearish sentiments in the fixed income market, we expect average yields on T-bills to trend higher in the coming week”, Cordros Capital projected.
Trading activities in the federal government secondary bonds market was also bearish following sell-offs in the early parts of the week from local and offshore investors, amid the uncertainty on the direction of yields, said Cordros Capital in a report.
The investment firm highlighted that the result of the Nigerian Treasury bills auction eased the sell-offs, as the uptrend in yields reversed on Thursday and Friday.
Accordingly, the average yield expanded by 22 basis points to 11.3%. It was also noted that across the benchmark curve, the average yield expanded at the mid (-46bps) and long (+25bps) segments as investors sold off the MAR-2027 (+68bps) and APR-2049 (+63bps) bonds, respectively.
Conversely, yield declined at the short (-13bps) end following demand for the APR-2023 (-49bps) bonds. This week, analysts expect the outcome of the bond auction to shape market sentiments and the direction of yields.
Read Also: Pressure Eased on Interbank Rates Day after CRR Debits
At the auction, the Debt Management Office will be offering instruments worth about NGN150.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.40% FGN MAR 2036 and 12.98% FGN MAR 2050 bonds.
