The Nigeria Bond Watch - Review and Outlook @120114

Proshare

Monday, December 1st, 2014 12:04 AM/ DLM Research

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ANALYSIS

Besides the OMO bills auction by the CBN, the major highlight of the review week was the meeting of the Monetary Policy Committee (MPC), which significantly influenced the direction of activities in the market.

At the conclusion of its meeting, the MPC acted beyond market expectations and increased MPR from 12% to 13%; increased CRR on private sector deposits from 15% to 20%; moved the midpoint of the official of the foreign exchange market from N155/US$ to N168/US$ and widened the band around the midpoint from +/-3% to +/-5% whilst CRR – on public sector deposits, liquidity ratio and net forex open position were retained at 75%, 30% and 1% respectively.

At the OTC market, earlier in the week, selling activities were experienced and yields inched up across most maturities as players reduced their fixed income positions due to speculations regarding the likely outcome of the MPC meeting. The increase in the MPR however provided comfort for domestic investors - mostly pension funds - whilst offshore investors remained cautious given current economic realities i.e. declining oil prices and foreign reserves. Consequently, the market recorded moderate intraday volatility due to increased demand from local investors and traders covering positions taken prior to the MPC meeting. This resulted in increase in the prices of traded bonds with yields shedding an average of 40basis points across board.

At the OMO window, a 175day bill worth N50.00billion was offered while N6.37billion was sold at higher marginal rate of 13.00%. We are of the opinion that the low allotment at the auction suggests the CBN was not inclined to sell at higher rates despite a relatively high subscriptions. We equally believe that inflow of c.N415.15billion that came in during the week from OMO bills redemption was mopped up by the hike in private sector CRR which saw an outflow of c.N450.00billion from the system.

In the week ahead, we expect that treasury bills worth c.N129.18billion will be offered across maturities (91day-N27.85billion, 182day-N30.00billion and 364day- N71.33billion) while treasury bills worth c.N129.18billion will be redeemed. We anticipate more selling activities this week and consequent rise in yields as market liquidity shrinks amidst the prevailing weak economic fundamentals.

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