June 29, 2021 / 02:45 PM / By Meristem Research / Header Image
Credit: Depositor photos
The Central Bank of Nigeria (CBN) will hold a Primary Market Auction (PMA) on 30th of June 2021 for NTB. At the PMA, Existing NTB totalling NGN81.74bn (NGN2.88bn, NGN20.00bn and NGN58.86bn across the 91-day, 182-day, and 364-day instruments) will mature and be rolled-over.
Outlook on Yields
At the last PMA, rates on the 91-Day (2.50%) and 182-Day (3.50%) instruments remained flat while the rate on the long end (364 days) reduced further by 24bps (to 9.40% from 9.64%). Investors' interest (indicated by average bid-to-cover of 9.21x vs 1.82x at the previous auction) was strong across all tenors. The significantly high bid-to-cover ratio was however due to the borrower's relatively low appetite (as only 17% of the amount raised at the previous PMA was raised, despite strong demand). In line with recent trends, demand was strongest on the long-end instruments, hence, the incentive to reduce the rate on it.
In the coming auction, we do not expect higher rates relative to the previous rates as there has not been any significant change in market dynamics since the last auction. Investor appetite remains robust particularly on the long end of the curve which the Federal Government will continue to exploit given its precarious revenue position. Noteworthy is the impact of the potential increase in fiscal deficit by NGN760.84bn (to NGN6.36trn) on debt service due to the NGN895.84bn supplementary budget recently forwarded to the National Assembly by the Budget Office for consideration and approval.
Meanwhile, sell-offs in the secondary market for T-Bills have persisted across all tenors. Consequently, average T-bills yield increased to 6.23% as at 28 th June 2021 (from 5.65% as at the last auction date). The high rate of inflation continues to spur negative sentiment in the secondary market despite the dearth of relatively safe alternative investment assets. Our view is that the bearish sentiment will persist in the near term, however, the relatively slower growth (or even plateauing) of PMA rates is a material risk to this outlook.
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: