The Nigeria Bond Watch - Review and Outlook @061316

Proshare

Monday, June 13 2016 11: 25 AM/ DLM Research

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ANALYSIS
During the review week, the Nigerian fixed income OTC market was influenced by: 1) the release of June 2016 FGN bond offer circular by the DMO; 2) OMO bills auctions and redemption; 3) CRR credit & FX refund - by the CBN; and 4) inflation expectation.

At the OMO auctions, the CBN offered OMO bills worth N200.00billion with tenors ranging between 206day and 315day but sold N93.18billion at marginal rate of 10.00%. Despite inflows from the CBN via CRR credit & returned provisions for unsuccessful FX bids (c.N650.00billion) and OMO bills redemption (c.N129.61billion) into the system, subscription levels at the auctions were still relatively low as the CBN only allotted 46.59% of total volume offered. In our opinion, the low allotment may be due to high bid rates submitted by dealers which may have increased the cost of managing liquidity.

It was a mixed reaction in the fixed income market last week as buoyant system liquidity enhanced buying activities of mostly shorter tenors whilst outlook in anticipation of higher May inflation fueled sell-off of mid and longer tenors. Consequently, yields rose by an average of 27basis points across the curve week-on-week.

The DMO is expected to re-open N15.00billion, N40.00billion and N50.00billion worth of 15.54% FEB 2020 (5yr), 12.50% JAN 2026 (10yr) and 12.40% FGN MAR 2036 (20yr) respectively at this week’s FGN bond auction. Also, treasury bills worth N152.44billion will be offered (91day: N35.10billion, 182day: N25.00billion & 364day: N92.34billion) whilst anticipating the redemption of treasury and OMO bills worth N152.44billion and c.N161.89billion respectively. The market may be predominantly bearish this week with consequent upwards movement in yields as system liquidity declines and dealers take positions ahead of the auctions whilst waiting for the release of the CBN’s policy framework on the flexible exchange rate regime.

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