July 13, 2021 / 05:03 PM / By Meristem Research / Header Image
The Central Bank of Nigeria (CBN) will hold a Treasury Bills (T-Bills) Primary Market Auction (PMA) on 14th of July 2021. At the PMA, existing T-Bills totalling NGN109.43bn (NGN12.46bn, NGN25.37bn and NGN71.60bn across the 91-day, 182-day, and 364-day instruments) will mature and be rolled-over.
Outlook on Yields
At the last PMA, average stop rate declined further to 5.03% from 5.13% at the last auction driven by a decline on the rate offered on the 364 day instrument (to 9.15% from 9.40%). Rates on the short (91-Day) and medium (182-Day) term instruments remained unchanged at 2.50% and 3.50% respectively. The direction of rates continues to be influenced by strong investor subscription (particularly on the 364-day instrument), and the need to minimise the Federal Governmentâ€™s borrowing cost. Relative to the previous auction, the FGNâ€™s appetite for 364 day bills was significantly stronger, thus overall bid-to-cover ratio reduced to 2.73x (from 9.21x) despite increased subscriptions.
In the coming auction, we expect the rates on the 91- and 182-Day instruments to remain unchanged in line with recent trends. However, we expect a further moderation in the rate on the 364-Day instrument, due to sustained robust investor appetite. This is in addition to further pressure on debt service charge arising from the need to finance the deficit in the NGN982.84bn supplementary budget approved by the National Assembly last week.
Meanwhile, the sentiment in the secondary market has been largely bullish since the last auction, as investors turned to the secondary market to fill unmet demand at the PMA (especially on the long end of the curve). Furthermore, the market has been reacting to the downtrend in average stop rates at recent PMAs. Average T-bills yield thus fell to 6.23% as at 12th July 2021 (vs. 6.74% from the last auction date). Nevertheless, we maintain that over the near term, average yield will rise slowly.
In view of the above, our rate guidance is informed by the need to strike a balance between the goals of maximizing investment returns and having a successful bid. Thus, the recommended stop rates for the respective instruments are as follows: