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MARKETS WRAP: Treasury bonds decline 11bps to 4.0% while overnight rate expanded 370 bps w/w to 4.3% as debits outweigh inflows from FAAC allocations


SAT, 21 NOV, 2020-theGBJournal- The overnight (OVN) rate expanded by 370 bps w/w, to 4.3% as debits late in the week for CRR, CBN’s weekly OMO and FX auctions and FGN bond auction (NGN80.00 billion) outweighed inflows from FAAC allocations (NGN363.25 billion), OMO maturities (NGN281.45 billion), FGN bond coupon payments (NGN8.45 billion) and FX retail refunds.

Cordros Research expect system liquidity to remain strained at the end of next week, as inflows worth a combined NGN80.55 billion – OMO maturities (NGN65.56 billion) and FGN bond coupon payment (NGN14.99 billion) – may not be sufficient to offset next week’s outflows for CBN’s auctions.

Just as we envisaged, activity levels remained subdued in the Treasury bills market, as investors remained wary of the low yields on offer. Nonetheless, the average yield across both segments of the market pared by 3bps to 0.1%.

The contraction in the overall yield was driven by the OMO secondary market (average yield declined by 6bps to 0.1%), as local banks reinvested maturities in mid and long tenor instruments. Average yield at the NTB segment was unchanged at 0.1%, as the market traded quietly through all trading sessions of the week.

With the still unimpressive yields in the T-bills market, we continue to expect muted activity in the space. At the NTB segment, we expect market participants’ focus to be on the PMA next week, where the CBN is expected to roll over NGN130.60 billion worth of maturities.

The bulls dominated the Treasury bonds secondary market this week as the average yield across instruments declined by 11bps to 4.0%. We attribute the bullish sentiment to the ample liquidity in the system, and as market participants covered for lost bids at the PMA. At the PMA, the DMO offered instruments worth NGN80.00 billion to investors through re-openings of the 12.50% MAR 2035 (Bid-to-offer: 2.2x; Stop rate: 5.00%) and 9.80% JUL 2045 (Bid-to-offer: 2.4x; Stop rate: 5.7850%) bonds. Despite a total subscription of NGN184.74 billion, the DMO eventually allotted instruments worth NGN80.00 billion, resulting in a bid-cover ratio of 2.3x.

‘’In the coming week, we retain our expectation for bullish trading in the Treasury bonds secondary market, as FGN bonds represent the only preferable alternative for fixed income investing,’’ says Cordros Research

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