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The Nigeria Bond watch – Review and Outlook @080116

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Monday, August 01, 2016 1:22pm/ DLM Research

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In our assessment of activities of the review week, the dominant themes were: 1) The CBN’s MPC meeting; 2) Statutory allocation from FAAC; and 3) OMO bills auctions and redemption by the CBN. 

The CBN’s Monetary Policy Committee (MPC) increased the Monetary Policy Rate (MPR) from 12% to 14%, whilst retaining the Cash Reserve Ratio (CRR) and Liquidity Ratio (LR) at 22.50% and 30% respectively. Also retained is the asymmetric corridor of +200/-500 basis points around the MPR. The MPC’s decisions were premised on severely weakened macroeconomic environment, as reflected particularly in increased inflationary pressure, contraction in real output and rising unemployment.

Consequently, an upward adjustment in interest rates strongly signalled the CBN’s commitment to price stability and desire to achieve positive real interest rates which gives impetus for improving liquidity and deepening the foreign exchange market to ensure self-sustainability, boost manufacturing and industrial output, thereby stimulating growth. 

At the OMO auctions, the CBN offered N170.00billion OMO bills with tenors ranging between 279day to 364day but allotted N215.67billion at marginal rates ranging between 18% to 18.50% as subscription stood at N382.79billion (225% of amount offered). In our opinion, the high subscriptions at the auctions are indicative of elevated system liquidity from FAAC allocation (c.N559.00billion) and OMO bills redemption (c.N156.99billion).

The fixed income market started last week on a quiet note as participants await the outcome of the MPC meeting. However, in reaction to the CBN MPC’s decisions, the short and mid tenors witnessed increased selling activities whilst the longer tenors saw slight demand as dealers came to cover positions taken prior to the MPC meeting. Hence, week-on-week, yields rose by an average of 160basis points across the curve. 

In the week ahead, the DMO is expected to offer N245.18billion T.bills - (91Day: N45.18billion, 182Day: N80.00billion and 364Day: N120.00billion), whilst treasury bills worth N245.18billion will be redeemed. The market may kick-start the week on a bullish note whilst market participants take position ahead of the treasury bills auction and anticipated OMO auction.

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