Bonds & Fixed Income | |
Bonds & Fixed Income | |
3439 VIEWS | |
![]() |
Friday, July 06, 2018 8:13PM / Proshare Research
In the wake of 2016, the Federal government in attempt to reflate the economy due to liquidity concerns coupled with hard pegs hinged deeply on the domestic money market by focusing primarily on short term instruments to fund the budget. The cost of financing the budget was high on the back of rising inflation and a hawkish monetary policy. Thus, the fiscal authorities found themselves absorbing huge debts at relatively high cost, making debt servicing a smoking elephant. Expected, the expected short rates have shifted from “rising to falling” on the back of dwindling inflation.
Fig 1: T-bill rate
Source: CBN
Liquidity premium have tilted from constant to rising, as forward rate take a lift - which is reflective in the OMO bills.
An humped yield curve gradually give way as a more inverse one take hold. Therefore the dynamic between a positive real rate and lower inflation premium, allows a lower discounted cash flow to be applied on federal government long term instrument. However, with the normalization of interest rate abroad, expected rise on long rate on foreign interest have begun to rise as the effective annual rates have risen too. Underlying the new reality that the cost of external borrowing will rise while the cost of domestic debt dampen as inflation fall.
Therefore a mildly bearish position has taken hold, even though we foresee an increase in the supply of long and medium term securities by the fiscal authorities to fund the N 9.12 trillion budget.
We also expect monetary authorities to revert back to dynamic sterilization in attempt to alter supply as the election season takes steam with the intent of influencing rates both at the interbank and exchange rate corridor.
Table 1: Treasury bill
Date |
Tenor (days) |
Yield (%) |
5/2/2018 |
91 |
10.2557 |
5/16/2018 |
364 |
11.9782 |
5/16/2018 |
182 |
11.0801 |
5/16/2018 |
91 |
10.2557 |
5/30/2018 |
364 |
12.3554 |
5/30/2018 |
182 |
10.8576 |
5/30/2018 |
91 |
10.2557 |
6/13/2018 |
364 |
12.9897 |
6/13/2018 |
182 |
11.0801 |
6/14/2018 |
91 |
10.4662 |
Source: CBN
Therefore, the rates are largely steep as inflation premium begin to trigger falling expected rate, while pinpointing to a more constant liquidity premium, compared to the past where liquidity premium increased.
Fig 2: Correlation between tenor and yield (Treasury bills)
Source: Proshare research
Table2 : Open Market Operation (OMO)
Date |
Tenor days |
Yield (%) |
4/27/2018 |
97.0 |
11.3 |
5/3/2018 |
245.0 |
13.2 |
5/3/2018 |
105.0 |
11.4 |
5/10/2018 |
231.0 |
13.2 |
5/24/2018 |
231.0 |
13.2 |
5/24/2018 |
112.0 |
11.4 |
5/25/2018 |
230.0 |
13.2 |
5/31/2018 |
112.0 |
11.4 |
5/31/2018 |
231.0 |
13.2 |
6/7/2018 |
112.0 |
11.4 |
6/19/2018 |
219.0 |
13.1 |
6/19/2018 |
93.0 |
11.4 |
6/25/2018 |
87.0 |
11.3 |
6/25/2018 |
213.0 |
13.1 |
Source: CBN
Fig 3: Correlation between tenor and yield (OMO)
Source: Proshare research
Related News
1. Fixed Income Monthly Update: June 2018 - Foreign Selloffs Stoke ''Bear Steepener''
2. Funding Rates Crash to c.5pct as c.N300bn T-bill Maturity Inflows hit the System
3. CILEASING N7bn Series I Bond Issuance Programme Records a Success
4. DMO Maintains 60% Rollover of Maturing PMA Bills
5. July 2018 FGN Savings Bonds Offer for Subscription
6. Bond Yields Trend higher as Market Players Stay Risk off
7. Fixed Income Market Monitor – Average Money Market Rate Increased by 10.42%
8. Offshore Selloff, Weak Local Demand Drive Bond Yields Higher
9. CBN Holds Off on OMO as Interbank SLF hits 5-Week High
10. Summary of June 2018 FGN Bond Auction
11. DMO Raises only Half of Total Bonds Offered in yet another Weak Auction
12. Bond Yields Tick Higher Ahead of Auction Tomorrow
13. Funding Rates rise above 10pct as CBN Resumes OMO Auction