The Bears Resurface as Average Yield Inches 7bps WoW Due to Tight System Liquidity

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Monday, June 29, 2020 / 12:43 PM / By Afrinvest Research / Header Image Credit: US News Money

 

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As expected, the bullish run came to a halt last week as the Nigerian Treasury Bills ("NT-Bills") secondary market recorded very quiet trading sessions on the back of low levels of financial system liquidity (from positive  N70.1bn on Monday to  N30.9bn at the end of the week) due to the absence of inflows from maturities or government allocations.

 

Thus, the CBN refrained from conducting any mop up activity as average yield on secondary market bills marginally improved 7bps W-o-W to close at 2.2%. In more detail, short-term NT-bills advanced +35bps as 30-Jul-21 bill gained 82bps W-o-W. While there were even more minimal activities on the medium- and long-term bills as both marginally inched +3bps and +5bps, respectively.

 

This week, financial liquidity is expected to improve significantly as maturing NT-Bills and Open Market Operations ("OMO") instruments worth N88.9bn and N157.2bn respectively hit the system.

 

However, we do not expect demand pressures on NT-Bills as the Apex bank is slated to rollover maturing bills in the first Primary Market Auction ("PMA") of  the second half of the year ("H2:2020") on Wednesday. In addition, we anticipate an OMO auction by the CBN to mop up inflows on Thursday.

 

Please see our expectation for the 01-Jul-20 PMA below:

Tenor

(91-Day)

(182-Day)

(364-Day)

Amount on Offer (N)

10,000,000,000

20,000,000,000

58,860,000,000

Expected Stop Rate Range (%):

1.50 - 1.80

1.95 - 2.20

3.50 - 4.00

 

In the first half of the year, we experienced downward yield trajectory in fixed income instruments amid unforeseen volatility due to the effects of the COVID-19 pandemic as domestic investors (especially institutional) had limited investment options. Going into H2:2020, we expect yields to remain low as investor demand on money market bills still overshadow supply.

 

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Thus, our advice to money market investors is to remain strategic in profiling their risk-to-return investment objectives and take advantage of slightly better opportunities presented in commercial paper offerings. While for investors willing to expand their risk horizons to riskier but better yielding investments, it is of paramount importance to conduct thorough due diligence and seek advice from professional investment advisors.

 

Please see below indicative NT-Bills rates:

Maturity

Tenor (Days)

Rate (%) p.a.

Yield (%) p.a.

30-Jul-20

31

2.55

2.56

24-Sep-20

87

3.55

3.58

26-Nov-20

150

4.40

4.48

14-Jan-21

199

4.65

4.77

11-Feb-21

227

4.75

4.89

Rates are valid till 01:45pm today (29-Jun-2020)

*Please note that the minimum subscription for T-Bills is N100, 000.00

 

FGN Bonds Update: Average Yield Declines 56bps W-o-W due to Sustained Investors Demand

 

On the flipside, the domestic bond space sustained the bullish momentum despite low financial system liquidity as investors scrambled to fill the remainder of unfulfilled primary market bond auction and Sukuk auction subscriptions. Therefore, average yield across FGN bond instruments declined 56bps to close at 8.8% W-o-W.

 

Precisely, short term bonds shed the most (-83bps) following declines in 14-Mar-2024 and 27-April-2023 losing -151bps and -127bps W-o-W, respectively. In the same vein the medium- and long-term bonds also dipped -41bps and -54bps W-o-W, respectively. 

 

Due to the more attractive yields, particularly on short-term bonds relative to money market offerings we believe demand would be sustained. However, we expect most domestic interests to be skewed to primary market offerings during the week.

 

We thus maintain our recommendation that investors cherry pick attractive bonds across the yield curve. Nevertheless, investors with shorter time horizons can also partake in primary offers available in the money market.

 

Please see below indicative FGN bond rates:

Bond

Tenor (Years)

Yield (%)

Coupon (%)

Implied Price

Jul-21

1

2.70

14.50

112.08

Jan-22

2

3.25

16.39

120.05

Apr-23

3

5.00

12.75

120.18

Mar-24

4

5.05

14.20

130.56

Mar-25

5

5.30

13.53

134.02

Jan-26

6

6.90

12.50

125.50

Mar-27

7

7.70

16.29

144.34

Feb-28

8

7.75

13.98

135.43

Jul-34

14

8.80

12.15

126.70

Mar-36

16

9.30

12.40

125.31

Apr-37

17

9.30

16.25

158.46

Apr-49

29

10.30

14.80

141.23

Rates are valid till 01:45pm today (29-Jun-2020)

*Please note that the minimum subscription for T-Bills is N20,000,000.00

 

Proshare Nigeria Pvt. Ltd.


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