The Nigeria Bond Watch - Review and Outlook @010713


Monday, July 01, 2013 9:16 AM / DLM Research

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In our assessment of the market last week, the key drivers of activities were the issuance and maturity of treasury and OMO bills, and an observed increase in interest from pension funds.


At the mid-week treasury bills auction, N31.84billion worth of 91day bills was offered and sold at the rate of 11.62% against 11.50% at the previous auction, while N21.54billion and N81.19billion worth of 182day and 364day were offered and sold at the rates of 12.75% and 13.22% respectively against 11.82% and 12.99% at the last auctions. Total subscription during the auction was N246.60billion (183.25%) versus N202.85billion at the last auction. In addition, a total of N92.62billion worth of treasury bills across maturities was allotted on a non-competitive basis.


In line with our expectation, liquidity tightening continued during the week as a total of N260.0billion worth of OMO bills with tenors ranging between 230days and 234days were offered while N68.45billion was sold at a marginal rate of 13.299%. In keeping with recent trends, the cut-off rate remained relatively higher than those at the treasury bills auction given the high bids submitted by investors (12.50%-14.00%). This contributed largely to the non-allotment of the 234days bills on the first day of OMO bills offer in the week. We therefore highlight the low sales at the auction i.e. ~26% of amount offered (Fig. 3), and the continuation of the situation in the OMO market where banks are seeking to maximise returns in the short term – on the back of the CBN’s continuous liquidity tightening, whilst the apex bank is equally seeking to achieve its monetary target at the lowest cost possible.


The OTC market recorded moderate intraday volatility in reaction to current factors driving activities in the domestic financial markets. However, demand signals – albeit weak – were seen in the latter part of the week, which resulted in minimal drop in yields across maturities; nonetheless, yield levels remained at the upper 13.0% levels. The demand was driven by the observed increase in interest from domestic pension funds due to the recent increase in yields following the outflow of foreign portfolio investments in the market. The highest change came from the 3M benchmark security with c.42bps whilst the next came from the 6M benchmark with c.2bps; the least affected was the 10Y with a c.-0.22bp change. In our view, the current levels of demand may be insufficient to drive yields below the 13.0% levels at which the market is currently trading; we therefore see a higher probability of the current trend being sustained in the days ahead.


In the week ahead, OMO bills worth c.N143.86billion will mature. We expect liquidity levels to remain elevated due to the effects of the maturing securities and the low sales during the OMO bills auctions of the review week. However, the CBN is expected to continue with its liquidity tightening measures.


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