Unexpected Crash in FGN Bond Yields Triggered by Short Covering from Market Participants

Proshare

Friday, June 18, 2021 / 8:26 AM / By Zedcrest Capital / Header Image Credit: Pexels


Proshare Nigeria Pvt. Ltd.


FGN Bonds

The FGN bond market witnessed a major short squeeze on selected bond papers due to persistent short-covering by traders, which triggered a rally across the entire bond yield curve. The 2045s saw the largest movement in yield terms as bids dropped to the sub 13% level at the early hours of trading with desperate buyers scrambling to lift any available offer in the market. The 2027s and 2035s papers also gained traction starting at 13.25% and 12.60% but then, shedding additional 20bps within the day. Consequently, yields compressed by c.23bps across the benchmark curve.

 

We expect investors to take a cautious view of the FGN bond market as most bonds especially at the long end of the curve approach the psychological 13.00% mark. 

 

Benchmark FGN Bonds

 

Description

Bid (%)

Offer (%)

Day Change (%)

12.75 27-Apr-23

11.98

11.04

(0.01)

14.20 14-Mar-24

12.23

11.55

(0.18)

13.53 23-Mar-25

12.49

11.37

0.00

12.50 22-Jan-26

12.49

11.07

0.00

16.29 17-Mar-27

12.70

12.50

(0.41)

13.98 23-Feb-28

12.72

12.40

(0.11)

14.55 26-Apr-29

12.70

12.38

(0.19)

12.15 18-Jul-34

13.55

13.02

(0.25)

12.50 27-Mar-35

13.75

13.01

(0.10)

12.40 18-Mar-36

13.50

13.01

(0.40)

16.2499 18-Apr-37

13.60

13.00

(0.20)

9.80 24-Jul-45

13.30

12.90

(0.55)

14.80 26-Apr-49

13.50

13.00

(0.40)

12.98 27-Mar-50

13.50

13.00

(0.40)

 


Treasury Bills

The T-bills market opened the day with a demand rush for the new 364 days NTB as local investors defaulted to the secondary market to cover their lost bids.  Most of the trades on the 364days paper were crossed at 8.90% and eventually closed the day at 8.60% levels on the offer. We also saw few offers on mid-long term OMO bills which remained shunned by buyers who were interested in dealing in the special T-bills due to the more attractive yield at 8.55%.

 

Tomorrow, we expect buyers to continue to show interest in the new NTB 1yr issue and special T-bills which should most likely be met with improved offers as we close the week.

 

Benchmark OMO Bills

Description

Bid (%)

Offer (%)

Day Change (%)

NGOMOB 0 09/07/21

11.00

1.50

0.00

NGOMOB 0 10/19/21

11.00

3.00

0.00

NGOMOB 0 11/02/21

12.00

2.00

0.00

NGOMOB 0 12/07/21

12.00

2.50

0.00

NGOMOB 0 01/11/22

12.50

2.50

0.00

NGOMOB 0 02/01/22

12.50

2.50

0.00

NGOMOB 0 03/01/22

12.50

3.50

0.00

 

Benchmark NT-Bills

Description

Bid (%)

Offer (%)

Day Change (%)

NIGTB 0 05/13/21

8.00

1.50

0.00

NIGTB 0 06/10/21

9.00

1.50

0.00

NIGTB 0 07/01/21

10.00

2.00

0.00

NIGTB 0 08/26/21

10.00

2.00

0.00

NIGTB 0 09/09/21

10.00

2.00

0.00

NIGTB 0 10/14/21

10.00

2.50

0.00

NIGTB 0 11/11/21

11.00

2.50

0.00

NIGTB 0 01/13/22

11.00

3.00

0.00

NIGTB 0 02/10/22

11.00

3.00

0.00

NIGTB 0 03/01/22

8.00

1.50

0.00

 


Proshare Nigeria Pvt. Ltd. 


Money Markets

Money market rates trended upward by another 238bps today, as system liquidity remained negative for a second consecutive session opening the day at -N66.38B, 27% lower compared to yesterday's open. Naira dealers continue to scramble for funds in the interbank market by increasing deposit rates to attract local investors, alternatively staying camped at the SLF space. Consequently, Open Buy Back (OBB) and Overnight (O/N) rates closed at 18.25% and 18.75% respectively at the end of the trading session.

 

We expect funding rates to stay elevated tomorrow as the market does not expect any significant inflows to alleviate the current illiquidity in the interbank space.

 

Money Market Rates

 

Current (%)

Previous (%)

Open Buy Back (OBB)

18.25

16.00

Overnight (O/N)

18.75

16.25

 


FX Market 

At the IEFX space, we saw a dip in the supply of the greenback, as traded volumes decreased by 30% DoD. However, the Naira remained relatively stable, closing the session 0.12% stronger at N411.50/$ despite the low volumes,

 

At the Cash market, panic selling was the order of the day on the back of the rumors of an expected increase in FX sales to the BDC segment of the market by the CBN. Rates initially opened at N476/$/N480/$, albeit these levels were short-lived as local demand drove rates back upward with the market eventually settling at 496/$ level.   The transfer market on the other hand traded flat as rates closed flat D/D at N514/$.


FX Market

Current (N/$)

Previous (N/$)

CBN SMIS

380.69

380.69

I&E FX Window

412.00

412.00

Cash Market

496.00

501.50

Transfer Market

514.00

514.00

 


Eurobonds: 

The NIGERIA Sovereigns had a calm trading session, as market attention shifted to other sub-Saharan markets. The Kenya market had the most traction of all the sub-Saharan markets as investors queued up their bids for the new 2034s issue.  As expected, it was a bullish auction with rates compressing by 0.58bps between the Book open and the Book close. Highlighted below are the terms of the bond as at Book close:

 

 REPUBLIC OF KENYA: FINAL TERMS

- Books > $5.25BN

- Final Terms: $1bn at 6.30%

 

At Nigeria Corporates space, the new ETINL 31 remained the toast of the market as sustained demand compressed yields further c.8bps D/D, closing around c.8.45% on the offer.


Proshare Nigeria Pvt. Ltd.


    Related News

    1.       Invest in FGN Monthly Bond Auction - June 2021

    2.      Standard Chartered Acts as Lead Manager in the ETI US$350m Tier 2 Sustainability Notes

    3.      Local Markets Resume from The Holidays with A Whimper, Eurobonds Risk-Off Ahead of US FED Meeting

    4.      Commercial Paper Issuance by Corporates to Increase in H2, 2021

    5.      Ecobank Transnational Incorporated Launches US$350m 10NC5 Year Tier 2 Sustainability Notes

    6.      CBN Advertises List of Investors with Unclaimed Interest and Redemption Proceeds on FGN Bonds

    7.      Traders Continue to Pile into the 1yr NTB Issue in the Light of the Meagre Supply of OMO T-Bills

    8.     Ahead of Next Treasury Bills Auction Scheduled for 9th of June 2021

    9.      ETI Announces Proposed Launch of $300m Fixed Rate Reset Tier 2 Sustainability Notes

    10.  PMA Holds on Wednesday; NT-Bills Average Yield Improves 2bps WoW

     

    Proshare Nigeria Pvt. Ltd.

    READ MORE:
    Related News
    SCROLL TO TOP