Bond Yields Break Key Support as Offshore Inflows Push I and E Rate to 4-Month Low

Friday, January 18, 2018/ 06:10AM / Zedcrest Capital 

***$1.1bn GI loan to create jobs, tackle food insufficiency*** – FG

KEY INDICATORS

Bonds

Interests in the bond market were largely focused on the mid tenors (27s and 28s) which were significantly compressed by c.16bps and c.30bps respectively, with the 27s breaking the 15% support to trade at a low of 14.80% whilst the 28s reached a low of 15.00%.

We have witnessed significant inflows from offshores as seen in the significant rise in volumes traded at the I&E window to c.$583m, with a corresponding compression in rates to a 4-Month low of N362.70/$. We have however note that the offshores have remained short duration, with most of the inflows invested in Treasury bills and others finding their way into the equities market which have posted four consecutive sessions of gains.

We consequently posit that the significant decline in bond yields have been largely driven by demand from local investors seeking to reinvest inflows from coupon payments. Whilst we expect this trend to persist in the near term, we expect yields to reverse above the 15% mark as the coupon demand wanes and the DMO floats the January bond auction which we expect to be relatively sizeable.

We consequently advise clients to take profit on bonds at these levels and to remain short duration until after the bond auction for the month.  

Source: Zedcrest Dealing Desk

Treasury Bills

Yields in the T-bills moderated further by c.10bps in today’s session, as buying interests remained supported by slight offshore demand in the market and inflows from OMO and PMA repayments.

The CBN however floated an OMO auction which attracted most of the offshore inflows that came into the market, with total subscriptions of c.N526bn of the N550bn offered and rates maintained across all tenors offered. Worthy of note however was the increase in demand for the short and mid tenor OMO offerings.

We however expect yields to trend higher tomorrow, with the CBN likely to conduct a further OMO auction, whilst the banks fund for a Retail FX auction by the CBN, all of which would compress system liquidity and fuel slight selloff mostly on the short end of the curve.

Source: Zedcrest Dealing Desk 

Money Market

Rates in the money market moderated by c.5pct, as inflows from Net OMO and PMA repayments (c.N80bn) bolstered system liquidity to c.N60bn Negative, from a Negative position of c.N140bn previously. The OBB and OVN rates consequently closed the session at 13.00% and 13.50% respectively.

We expect rates to trend higher tomorrow with the CBN expected to debit banks for its bi-weekly retail FX intervention.

Source: FMDQ, Zedcrest Research

FX Market

At the Interbank, the Naira/USD rate fell back by c.0.16% to N306.85/$ at the spot market, while the SMIS rate remained unchanged at N356.73/$. The NAFEX rate in the I&E window also appreciated further by c.0.10% to a 4-Month low of N362.70/$ following continued FX supply from offshores into the market, with total traded volumes also hitting a 4-Month high of $583m. Rates at the parallel market however remained pressured, with the cash rate rising by 0.06% to N361.20/$, while the transfer rate remained unchanged at N365.50/$.

Source: CBN, FMDQ, REXEL BDC

Eurobonds

Investors’ interests waned slightly on the NGERIA Sovereigns with yields retracing higher by c.3bps average following slight sell on the long end of the curve (38s – 49s).

In the NGERIA Corps investors interest dampened slightly on the DIAMBK 19s and FBNNL 21s which rose by c.15bps, we however witnessed slight interests on the ACCESS 21s Snr.

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