Yields on Fixed Income Assets Fall as Spot Rate Swing
The average yields on fixed income instruments assets fall as the rising headline inflation rate widened negative real return. At the primary market auction conducted by the Debt Management Office last week, spot rates swing – unchanged, decline and rise across maturities.
In the money market, there was liquidity strained in the financial system position, resulting in an increase in short term rates. Inflow from open market operations (OMO) maturities worth N35 billion hit the financial system and N6.6 billion primary market repayment.
Consequently, the average interbank rate inched upward on the back of jumps in open buyback or repo rate and surged in the overnight lending rate. This was a result of a more than 62% week on week drop in financial system liquidity which printed at N92.5 billion on Friday.
According to Cordros Capital report, the overnight rate expanded by 333 basis points week on week to 12.5%, as debits for cash reserve ratio, FGN bond worth N378.41 billion and Central Bank of Nigeria (CBN) weekly auctions (OMO and FX) pressured the system.
Repo rate inched upward 358 basis points to 12.5%, according to market data. Analysts expect liquidity in the financial system to improve this week due to N149.3 billion inflow from Nigerian Treasury bills and N30 billion from OMO maturity.
“The combination of these funds outflows offset inflows from the open market operation (OMO bills) maturities valued at N35.00 billion, FGN bond coupon payments totaled N8.50 billion and foreign exchange retail refunds”.
Analysts expect system liquidity to remain strained next week, as expected inflows worth a combined N39.37 billion from OMO maturities at N30.00 billion and FGN bond coupon payment worth N9.37 billion may not be sufficient to saturate the system.
Last week, trading activities in the Nigerian Treasury Bills (NTB) secondary market were mixed albeit with a bearish bias, following the uncertainty in the direction of yields at the recent primary market auctions.
Thus, the average yield across all instruments expanded slightly by a basis point to 3.8%, according to traders’ notes. Across the segments, Cordros analysts said the average yield contracted by 7 basis points to 4.0% at the OMO segment but expanded by 3 basis points to 3.7% at the NTB segment.
Considering the relatively lower inflows expected in the system next week, analysts expect low demand for T-bills and a slight expansion in yields from current levels. However, in the NTB segment, the expectation is that the market focus will be shifted to the primary market auction on Wednesday, where the CBN is expected to roll over N153.03 billion worth of instruments.
MarketForces Africa reported that the Debt Management Office (DMO) held its monthly auction of FGN bonds on Monday. Nigeria’s debt agency offered N225 billion but raised N378.4 billion, the auction result shows. The sum was raised through re-openings of the 2025, 2032 and 2042 FGN bonds. The auction result indicates that the DMO secured a total bid of N575.6 billion.
The successful bids for the 3, 10 and 20-year benchmarks were allotted across maturities at the marginal rates of 10.0% (unchanged), 12.45% (previously; 12.5%) and 13.0% (previously; 12.9%) respectively from the previous month.
The DMO has a domestic funding target of N3.53 trillion towards the projected deficit of N7.35 trillion in the FGN’s 2022 budget – its external funding target is N2.56 trillion.
“We recall that the DMO raised N1.66 trillion (gross) and N2.32 trillion (gross) from FGN bond sales in 2020 and 2021 respectively”, Coronation Merchant Bank Research said in a market report.
In the secondary market for FGN bonds, trading activities remained unsettled but there was a bullish bias in the market. Traders reacted to hot inflation readings for April, thus, the average yield across instruments declined by 10 basis points to 11.2%.
Trading data shows that FGN bonds value traded in the secondary market went in mixmag as well as the yields for the maturities tracked, Cowry Asset said in a note.
Specifically, the 10-year 16.29% FGN MAR 2027 papers gained N0.64, their corresponding yields fell to 10.90% (from 11.07%). However, the 20-year, 16.25% FGN APR 2037 bond lost N2.22; its corresponding yield rose to 12.51% (from 12.24%).
However, the 15-year 12.50% FGN MAR 2035 bond and the 30-year 12.98% FGN MAR 2050 instrument remain flattish for the week, traders’ notes show. Fixed income analysts attribute the bullish sentiment to investors covering for lost bids at the FGN bond auction which was held on Monday.
Across the benchmark curve, it was noted that the average yield contracted at the short (-2bps) and mid (-27bps) segments as investors sold off the MAR-2027 (-17bps) and NOV-2029 (-34bps) bonds, respectively.
But, yields on the bonds instruments expanded at the long (+2bps) end following investors’ profit-taking activities on the APR-2037 (+27bps) FGN bond. Elsewhere, analysts stated that the value of FGN Eurobonds traded at the international capital market depreciated for all maturities tracked on sustained bearish sentiment.
Specifically, the 10-year, 6.375% JUL 12, 2023 bond, the 20-year, 7.69% FEB 23, 2038 paper and the 30-year, 7.62% NOV 28, 2047 debt lost $1.01, $0.59 and $0.82 respectively. The financial assets corresponding yields increased further to 9.16% (from 8.16%), 12.23% (from 12.11%) and 11.90% (from 11.76) respectively, according to traders notes.
“We expect the value of FGN Bonds, especially for 42s to increase amid increased demand due to the N55.94 billion maturing bills in the money market”, Cowry Asset projected.
Analysts at Cordros Capital maintain a view of an uptick in bond yields in the medium term, as both the FGN’s borrowing plan for 2022 and expected fiscal deficit point towards an elevated supply. #Yields on Fixed Income Assets Fall as Spot Rate Swing