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Markets Wrap: T-bills record subscription level of N446.01 billion, Treasury bond average yield drops by 36bps to 11.6% on bullish trade and OVN rate drops to 12.5% w/w

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Bond secondary market

SAT 03 JULY, 2021-theGBJournal- The overnight (OVN) rate declined by 10.50ppts w/w to 12.5%. The contraction was due to improved system liquidity as inflows from FAAC disbursements (NGN363.86 billion) outweighed outflows for NTB net issuances (NGN81.87 billion) CBN’s weekly FX auctions.

We expect tighter liquidity in the system next week, as funding pressures from CBN’s weekly auctions are likely to outweigh expected inflows from OMO (NGN30.00 billion) maturities.

Treasury bills

Trading in the Treasury bills secondary market turned bullish, following the boost to system liquidity.

Consequently, the average yield across all instruments declined by 5bps to 8.4%. Across the curve, we witnessed sell-offs of OMO instruments as local banks exited positions following the dearth of liquidity at the start of the week. Thus, the average yield at the OMO segment expanded by 18bps to 9.9%.

We highlight that the CBN did not float an auction this week. Elsewhere, demand was stronger in the NTB secondary market (average yield contracted by 32bps to 6.6%) as market participants took to the secondary markets to cover lost bids.

At the auction, The CBN offered NGN81.74 billion – NGN2.88 billion of the 91-day, NGN20.00 billion of the 182-day, and NGN58/86 billion of the 364-day bills, and ultimately allotted NGN163.61 billion.

The auction stop rates were 2.50% (unchanged), 3.50% (unchanged), and 9.15% (previously 9.40%) on the 91D, 182D and 364D bills, respectively. We highlight that the auction was oversubscribed with a subscription level of NGN446.01 billion, translating to a bid-to-cover ratio of 2.7x.

In the week ahead, we expect the yields on T-bills to inch higher, as we believe the respite to system illiquidity that ensued this week is unlikely to persist. Hence, we expect sell pressures to resurface.

Bonds

The Treasury bonds secondary market remained bullish, as the average yield declined by 36bps to 11.6%. We attribute the decline to the improved system liquidity and cherry-picking activities of investors. Across the curve, average yield at the short (-50bps) and mid (-35bps) and long (-33bps) segments contracted, following demand for the JAN-2026 (-80bps), MAR-2027 (-55bps) and JUL-2034 (-60bps) bonds, respectively.

We maintain our expectation of increased demand for bonds in the near term and expect yields to continue to moderate as investors leverage the increased market supply and take positions ahead of the maturing JUL-2021 bond.-With Cordros Research.

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