Bond yields: Decline to persist as demand intensifies, N153bn inflow boost interbank

BOND YIELDS: Decline to persist as demand intensifies, N153bn inflow boost interbank

INVESTORS demand for  Federal Government bonds  is expected to  intensify this week leading to further drop in yields amidst inflow of N153 billion into the interbank money market. Last week, average yields on FGN bond traded on the Over-The- Counter, OTC, segment, dropped by 14 basis points (bpts) following increase in prices triggered by rise in demand fuelled by the 50 basis reduction in the Monetary Policy Rate (MPR) last week by the Central Bank of Nigeria (CBN), as well as the decline in stop rate on the FGN bond auction held by the Debt Management Office (DMO) during the week.

The DMO sold bonds worth N29.35billion, comprising 12.75 per cent FGN APR 2023 (5-Yr Re-opening) worth N3.80billion, 13.53 per cent FGN MAR 2025 (seven-Year Re-opening) worth N5.55 billion and 13.98 per cent FGN FEB 2028(10-Year Re-opening) worth N20.00billion respectively. The five-year, seven-year and 10-year bonds were auctioned at lower stop rates of 13.50 percent, down from 14.52 percent, 13.50 percent down from 14.80 percent, and 13.50 percent down from14.94 percent respectively. The result of the bond offer which was oversubscribed by 40 percent, led to increased demand for FGN bond on the OTC segment leading rise in prices and decline in yields. Consequently, the five-year, 14.50 per cent FGN JUL 2021 paper, the seven-year, 13.53 per cent FGN MAR 2025 note and the 10-year,16.29 per cent FGN MAR 2027 debt gained N1.16, N0.98 and N0.15 respectively; while their corresponding yields moderated to 14.06 percent, from 14.67 percent; 14.13 percent, from 14.38 percent; and 14.25 percent, from 14.29 percent respectively. This trend according to analysts at Lagos based Cowry Asset Management Limited is expected to persist this week, especially in view of N153 billion inflow from maturing treasury bills expected during the week. “In the new week, we expect FGN bond prices to increase, with corresponding fall in yields, at the OTC market amid expected ease in financial system liquidity.” Expressing similar projection, analysts at Afrinvest Plc, stated: “At the close of the week, average bond yields settled at 14.04 percent, shedding 14bps week-on-week (W-o-W.)  We expect the current attraction of the market to gradually compress yield in the short term.”   CBN to further reduce stop rates on TBs Meanwhile, the CBN is expected to further lower stop rates on treasury bills (TBs) when it conducts primary market auction to roll-over N95.68 billion worth of maturing TBs this week. At the last auction held on March 21, 2019 (two weeks ago), the CBN further reduced stop rates on the 91-day, 182-day and 364-day bills by 45 bpts, 30 bpts and 49 pts respectively. Between the first auction on January 16 and the auction held on March 21, stop rate on 91-Days bills dropped by 70 bpts to 10.3 percent last week from 11 percent on January 16. Stop rate on 182-Days bills fell marginally by 90 bpts to 12.2 percent from 13.1 percent on January 16. The biggest decline was recorded by the stop rate for 364-Days bills which fell by 264 bpts to 12.36 percent from 15 percent on January 16. Projecting that this trend will continue this week, analysts at Cowry Asset Management Limited said: “In the new week, CBN will rollover T-bills worth N95.68 billion, comprising 91-day bills worth N10 billion, 182-day bills worth N17.60 billion and 364-day bills worth N68.08 billion. We expect their stop rates to fall amid buy pressure.”

Uncertain outlook for cost of funds However, the  sharp decline in cost of funds in the interbank money market last week may not persist this week in spite of  the expected inflow of N153 billion from maturing TBs. Last week, average short term cost of funds fell by 430 bpts buoyed by inflow of N61 billion from matured secondary market (Open Market Operation, OMO) TBs as well as absence of OMO auctions by the CBN to mop up liquidity. Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending dropped by 439 bpts to 9.86 percent last week from 14.25 percent the previous week. Similarly, interest rate on Overnight lending dropped by 416 bpts to 10.67 percent last week from 14.83 percent the previous week. Analysts at Afrinvest, however, stressed that the direction of cost of funds this week will be largely determined by the decision of the CBN to issue OMO bills to mop up liquidity. “Given the long position of the market, we expect demand levels to remain buoyant, especially with OMO maturities of N68.1bn expected next week. However, if the CBN were to commence OMO auctions in the coming week after this week’s pause, we could see market activities turn as the liquidity level shrinks,” they said. Naira depreciates as I&E turnover falls by 35 per cent Meanwhile the naira depreciated in the parallel market as well as  in the Investors and Exporters market, I&E, last week even as the CBN sustained its weekly intervention by injecting $210 million into the interbank foreign exchange market. According to, the live exchange rate platform of the Association of Bureaux De Change Operators of Nigeria, ABCON, the parallel market exchange rate rose to N358.5 per dollar last week from N358 per dollar the previous week, indicating 50 kobo depreciation. That naira also depreciated by 25 kobo in the I&E window, as  the indicative exchange rate rose to N360.68 per dollar last week from N360.43 per dollar the previous week. Furthermore, data from FMDQ  showed that the volume of dollars traded in the window fell by 35 percent last week to $1.1 billion from $1.7 billion the previous week.

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