Tuesday, February 23,
2021 / 04:31PM / by Meristem Research / Header Image Credit: iStock
The Central Bank of Nigeria (CBN) will hold a Treasury Bills (T-Bills) Primary Market Auction (PMA) on 24th of February 2021. Existing T-Bills worth NGN20.37bn, NGN55.85bn and NGN52.00bn across the 91-day, 182-day, and 364-day instruments respectively will mature, and the CBN will re-issue NGN20.37bn, NGN55.85bn and NGN52.00bn across same tenors respectively.
Outlook on Yields
Much in line with our expectation, investors demanded significantly higher rates at the last PMA, as indicated by the range of bids. Stop rates were thus increased to 1.00% (vs. 0.55% at previous auction), 2.00% (vs. 1.31% at previous auction), and 4.00% (vs. 2.04% at previous auction) across the 91-day, 182-day and 364-day instruments respectively. Although the CBN was able to raise more money than it planned, we note that investors' appetite continued to weaken with a decline in overall bid-to-cover ratio to 1.51x from 1.59x. We maintain that given the current inflationary trend, investors will continue to demand higher rates at PMAs and their participation will be limited by rates offered by the government.
The secondary market on the other hand has been relatively bearish since the last PMA as average Treasury bills yield rose from 1.20% recorded on the date of the last auction to 1.48% as at 19th February 2021. The expectation of higher yields in the future due to higher PMA rates may have led to selloffs by investors to minimize further capital losses and also to take advantage of higher rates at the PMA. Also, the relatively low interbank liquidity since the last auction was a key driver of the bearish run in the secondary space.
While we note that government revenues are expected to perform relatively better this year due to increased economic activities and the positive outlook for oil receipts, the current size of Federal Government debt and planned borrowing in 2021 implies rapidly mounting pressure on revenue through higher servicing costs. This also places a constraint on the FGN's ability to offer risk-reflective rates. It therefore remains uncertain how far higher rates can go at the PMAs. For the upcoming auction however, we expect only a slightly higher adjustment in rates from the previous auction.
We advise rates with the dual purpose of achieving the best possible yields, as well as ensuring the success of the bid. The recommended stop rates for the respective instruments are listed below: