Upward Repricing of Rates Unlikely as Non-bank Investors Exit OMO
As non-bank local investors gravitate fully out of the Open Market Operations (OMO) bills in October, analysts said they do not expect significant upward re-pricing of yields in the fixed income market.
The Nigeria 1 year Government Bond reached a maximum yield of 19.711% (29 October 2017) and a minimum yield of 1.532% (5 October 2020).
Meanwhile, 2 Years Government Bond had reached a maximum yield of 16.806% in February 2019 and a minimum yield of 1.984% in 29 September 2020.
Chapel Hill Denham said upward yields repricing is unlikely as market continues to maintain strong level of liquidity, a major determining factor in rates movement.
The firm however said that market will trade with caution in October, 2020 ahead of two key events.
In its note, the firm stated that bond investors will be paying close attention to budget proposal and local investors exit in OMO this month to gauge market direction.
Analysts said presentation of 2021 budget proposal – approved by the Federal Executive Council- to the parliament as of a great interest to bond investors.
President Muhammadu Buhari is expected to present 2021 spending plan to the parliament this week.
Federal Government expenditure for the year is estimated at N13.08 trillion with fiscal deficit pegged at N4.48 trillion.
A substantially lower (compared to revised 2020 budget) domestic borrowing plan may be interpreted as bullish, Chapel Hill Denham hinted.
The firm stated that secondly, non-bank local investors will fully rotate out of OMO bills later this month, and investors will be looking to see how the market navigates this period.
“While we expect the markets to trade with caution ahead of these events, we do not expect a sizeable upward repricing of yields in the near term, given that the liquidity backdrop is still supportive”, the firm said.
In the money market, as expected, funding pressures remained benign as the market re-opened Monday for the new trading week.
Financial system liquidity was buoyant, opening higher at N415 billion from N335 billion.
The Open Buy Back (OBB) and Overnight (OVN) rates declined by 12 basis points bps and 2bps to 0.88% and 1.56% respectively.
“We expect funding pressures to remain benign this week, with a large OMO maturity expected on Thursday worth N567.69 billion”, Chapel Hill Denham stated.
Meanwhile, analysts at Chapel Hill Denham said the fixed income market traded with a slight bullish bias Monday.
At the front end of the curve, the Nigerian Treasury Bills (NTB) benchmark curve was unchanged at an average of 1.92%.
However, the OMO benchmark curve compressed by 33bps to 1.78%, due to positive sentiments across the curve: short (-3bps to 1.50%), mid (-87bps to 1.68%) and long (-8bps to 2.16%) day to maturity (DTMs).
Analysts said the bond market also traded slightly bullish, with renewed interests in intermediate (-3bps to 7.03%) and long (-8bps to 8.84%) duration bonds.
Notwithstanding, the bond yield curve expanded by an average of 4bps to 6.55% due to upward repricing at the short end of the curve.
The S&P/FMDQ Nigerian bond index returned +6.4% in September, to erase the 4.1% loss recorded in August, also taking year-to-date gain to 30%.
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Upward Repricing of Rates Unlikely as Non-bank Investors Exit OMO
