The Nigerian Bond Watch @130212 - DLM


 Monday, February 13, 2012 12:03 PM

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The secondary market for FGN bonds continued its downward trend from the preceding week as traders realized profits on bonds from the previous auctions. The announcement of the OMO auction by CBN further strengthened the trend. However, no OMO bills were allotted at the auction due to the high bid rates. We note the dramatic increase in stop rates over the last 12 auctions from sub-10% levels to circa 17% during the last auction (see fig. 3) indicating an increase in investors’ preference for the short end of the yield curve. We are therefore inclined to highlight that the last time OMO rates climbed to double-digit levels was in 2004 when average yield at the OMO sessions was 13.50% for the year. 

In addition, our assessment equally draws attention to the widened spread between rates on government treasuries and bank deposit rates. We believe this window presents an opportunity to non-financial institutions or high networth individuals (HNIs) to take advantage of the prevailing high-rate regime to include some relatively risk-free and high yield securities in their respective portfolios compared to current bank deposit rates. For example, we estimate that the spread between 91-day treasuries and 3-month deposit rates have widened from 2.58% in January 2011 to c. 8.20% at present. (see fig. 3)

Also during the week, the third treasury bills primary auction this year was held during which the central bank sold N67.22 billion in 264-day paper at 16.89%, N50 billion in 182-day at 16.09% and N32.06 billion of 91-day bills at 14.70%. We note that the marginal rates at the week’s auction were slightly lower when compared to that of January 25th where rates were 16.10% and 14.79% for 180-day and 91-day respectively. The total subscription stood at N316.85 billion as against N258.13 billion recorded at the previous auction.

In the week ahead, the DMO will reopen about N70 billion of medium tenured bonds; N35 billion each of 7% October 2019 and 16.39% January 2022. We expect slightly higher marginal rates for these issues compared to the 16.00% and 16.39% for the 2019 and 2022 bond respectively at the January auction. Currently, the secondary market yields for these instruments are 16.21% and 16.51% for the 2019 and 2022 Bonds respectively.

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