SAT 20 FEB, 2021-theGBJournal- The overnight (OVN) expanded by 15.75ppts w/w, to 20.5%. The rate was depressed at the beginning and middle of the week, following inflows from OMO maturities (NGN207.84 billion) and FX retail refunds into the system. However, provisioning for CRR by banks, and FGN bond (NGN80.55 billion), OMO (NGN180.00 billion) and FX auction debits at the twilight of the week pressured system liquidity and drove the rate northwards.
In the coming week, inflows from OMO (NGN472.22 billion) and NTB (NGN128.22 billion) maturities, as well as FGN bond coupon payments (NGN49.89 billion), will hit the system. Consequently, we expect the overnight lending rate to contract.
The Treasury bills secondary market turned bullish, as the average yield across all instruments declined by 28bps to 4.1%. As in prior weeks, activities in the OMO secondary market primarily drove proceedings in the broader market, as local banks reinvested excess liquidity from OMO maturities – especially at the long (-17bps) end of the curve. Thus, the average yield in the space contracted by 32bps to 6.4%.
At this week’s OMO auction, the CBN maintained stop rates across the three tenors, selling NGN180.00 billion worth of bills to market participants. Elsewhere, trading in the NTB secondary market was relatively muted (average yield increased slightly by 2bps to 1.5%) as weak sentiments persisted.
For next week, we expect the yields on T-bills to maintain the same trajectory, following the ample liquidity expected in the system. Also, we expect quiet trading at the NTB market as participants position for next week’s PMA, where the CBN is expected to roll over NGN128.22 billion worth of maturities.
The Treasury bonds secondary market remained bearish as demand weakened following Wednesday’s bond auction; investors continued to price in the higher rates at the T-bills market, and the market reacted to another inflation uptick (January 2021 CPI: 16.47%).
Thus, the average yield expanded by 37bps to 9.4%. Across the benchmark curve, the average yields at the short (+19bps), mid (+31bps), and long (+38bps) segments sustained their expansions, as investors sold off the JAN-2026 (+121bps), FEB-2028 (+45bps) and JUL-2045 (+130bps) bonds, respectively.
At the primary auction, the DMO offered instruments worth NGN150.00 billion to investors through re-openings of the 16.2884% FGN MAR 2027 (Stop rate: 10.25%), 12.50% MAR 2035 (Stop rate: 11.25%) and 9.80% FGN JUL 2045 (Stop rate: 11.8%). We note that demand was weaker (subscription: NGN189.51 billion; bid-to-offer: 1.3x) compared to January (Subscription: NGN238.27 billion; Bid-to-offer: 1.6x).
Due to investors’ demand for higher yields, the DMO allotted only NGN80.55 billion and opted to issue an additional NGN122.00 billion via non-competitive allotment, bringing the total sale NGN202.55 billion. Stop rates rose by an average of 254bps compared to the previous auction.
Considering the higher yields at various auctions across the fixed income market, we expect bond investors to continue to clamour for higher yields in the short-to-medium-term.-With Cordros Research