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Yields Retreated As Fixed Income Markets Reacts To CBN's Special Bills

Bonds & Fixed Income	804 VIEWS
Bonds & Fixed Income
804 VIEWS

Thursday, December 03, 2020 / 11:17 AM / by Zedcrest Capital / Header Image Credit: FMDQ Academy

FGN Bonds

It was a haywire trading session for FGN Bonds, as the market reacted negatively to the introduction Special Bills for excess Cash Reserve Requirement balances announced by the CBN via a circular. The market opened the session with very wide bid-ask spreads (average of 340bps across the curve) as participants remained unsure of how-to price-in the effects of the new instruments. Bids later improved at the long-end of the curve, with the 2049s and 2050s papers settling at 7.20% with decent volumes crossed at those levels. Yields rose by c.231bps on the average across the benchmark bond curve by the close of the session.

We expect the uncertainty in the market to endure albeit with toned-down volatility. Current elevated yields also present good buy opportunity for some local institutional investors with residual liquidity. Yields should remain stable with tighter spreads in tomorrow's trading session.

Benchmark FGN Bonds
Description	Bid (%)	Offer (%)	Day Change (%)
16.39 27-Jan-22	4.60	1.04	3.72
12.75 27-Apr-23	5.93	1.99	3.65
14.20 14-Mar-24	4.99	2.13	2.07
13.53 23-Mar-25	6.99	2.20	3.99
12.50 22-Jan-26	6.96	3.60	3.06
16.29 17-Mar-27	7.00	3.80	2.61
13.98 23-Feb-28	7.00	4.15	2.60
14.55 26-Apr-29	7.00	4.20	2.61
12.15 18-Jul-34	7.15	5.20	1.85
12.50 27-Mar-35	7.02	5.20	1.72
12.40 18-Mar-36	7.50	5.20	2.20
16.2499 18-Apr-37	7.50	5.20	2.20
9.80 24-Jul-45	7.50	5.64	1.35
14.80 26-Apr-49	7.50	6.90	0.47
12.98 27-Mar-50	7.50	6.90	0.50

Treasury Bills

Treasury bills also had a bearing session, as the expectation of supply from the CBN Special Bills caused bid in the market to evaporate. Local banks and offshore investors, the only holders of current OMO bills, flooded the market with offers of OMOs and NTBs across the board but with no bidding interests. The long-dated papers remain the most liquid, with offers for the 1-year papers coming out as high as 0.50% (another 10bps uptick recorded in consecutive sessions). Rates expanded further by c.45bps on the average across the benchmark OMO and NTB curves, with both papers interestingly priced at similar levels for the first time all year.

The jury remains out on the full effects of the expected Special Bills on the current market dynamics. The tradability of the Special Bills between banks, retail and institutional investors pose a threat to the allure of treasury bills rates, especially NTBs. We expect rates in the markets to remain pressured, as current holders seek to offload their stock before rates move significantly against them.

Benchmark OMO Bills
Description	Bid (%)	Offer (%)	Day Change (%)
NGOM 01/05/21	0.50	0.15	0.35
NGOM 02/02/21	0.50	0.20	0.35
NGOM 03/02/21	0.80	0.20	0.45
NGOM 05/11/21	0.80	0.30	0.45
NGOM 06/08/21	0.80	0.30	0.45
NGOM 08/10/21	0.80	0.35	0.45
NGOM 09/07/21	1.00	0.45	0.55
NGOM 10/19/21	1.00	0.50	0.55
Benchmark NTBills
Description	Bid (%)	Offer (%)	Day Change (%)
NIGTB 12/31/20	0.50	0.15	0.35
NIGTB 01/14/21	0.50	0.20	0.35
NIGTB 02/11/21	0.80	0.20	0.45
NIGTB 03/11/21	0.80	0.30	0.45
NIGTB 04/29/21	0.80	0.30	0.45
NIGTB 05/13/21	0.80	0.35	0.45
NIGTB 06/10/21	1.00	0.45	0.55
NIGTB 07/01/21	1.00	0.50	0.55
NIGTB 08/26/21	0.50	0.15	0.35
NIGTB 09/09/21	0.50	0.20	0.35
NIGTB 10/14/21	0.80	0.20	0.45

Money Markets

Money market rates remained stable in today's session, with no immediate pressure on the system. System liquidity opened the session at N635Bn (1.13% higher D/D), while the OBB and OVN rates closed at 0.67% and 1.00% respectively.

We expect rates to remain stable in the interim, with outflows from Retail FX interventions not expected until later in the week.

Money Market Rates
	Current (%)	Previous (%)
Open Buy Back (OBB)	0.67	0.75
Overnight (O/N)	1.00	1.00

FX Market

The parallel market reversed the previous day's trend as market participants mopped up all the supply from yesterday's panic selling following the CBN's circulars on IMTO flows. The previous day's gains on the cash rates were all but wiped out, opening the session at N450/$ but rising quickly to close at N475.00/$ marking 3.26% depreciation in a single day. The transfer rate which has remained less volatile continued its gradual appreciation, gaining N5.00 (1.01%) to close at N490.00/$.

We expect parallel market rates to converge as the demand for USD cash continues to pressure the markets, while the official markets continue to expect the CBN to beef-up the volumes of its intervention sales to boost liquidity in that space.

FX Market
	Current (N/$)	Previous (N/$)
CBN Spot	379.00	379.00
CBN SMIS	380.69	380.69
I&E FX Window	395.00	394.00
Cash Market	475.00	460.00
Transfer Market	490.00	495.00

Eurobonds

Yields on the NIGERIA Sovereigns posted a second consecutive positive session, as demand for the sovereign papers improved. We noted demand across the sovereign curve, with the biggest moves seen at the short-end of the curve. Consequently, yields compressed further by c.10bps on the average across the sovereign curve.

The NIGERIA Corporates has a less active session, with improved demand on the tracked papers matching the supply seen. Most trades we witnessed crossed at the market bids as offshore appetite for yield strengthened.

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