(Greenwich Merchant Bank): The bearish sentiment persists in the Fixed Income Market from the prior trading week. Investors continued selling off their holdings to re-position for the new year. As a result, the average yield in the fixed income market spiked by 10bps to settle at 2.67% from 2.57% the prior week.
Investors at the NT-bill market flooded the market with offers towards the end of the week following improved stop rates offered at the Primary Market Auction (PMA) in the week. Thereby, the average yield in the NT-bill market soared by 8bps to 0.51% from 0.43%.
On the flip side, tables turned at the OMO-bill market as trades consummated across the curve at the close of the week offset the rising yields witnessed on high offers at the start of the week. Market players cherry-picked oversold bills offering high yields in an act of bargain hunting. Consequently, the average yield in the OMO-bill market eased by 7bps to 0.78% from 0.85%.
The Apex bank in its scheduled PMA offered bills worth NGN232.4bn, albeit allocating a paltry 46.1% following the widened bid range demanded by investors who sought for higher yield. The Apex Bank in a bid to resist a drastic spike in rates redeemed NGN125.1bn and sold just NGN107.2bn worth of bills across the 91DTM, 182DTM and 364DTM at relatively improved rates of 0.500% (prev. 0.035%), 1.000% (prev. 0.500%) and 1.500% (prev. 1.210%) respectively.
The robust system liquidity (avg. NGN312.6bn) and the dearth of alternative investible asset saw the bid-to-cover ratio settle at 1.2x at the close of the auction.
Despite settlement obligations from primary market activities, the banking system remained robust with liquidity at the twilight of the week (avg. NGN312.6bn), Money Market rates softened into lower single digit. Thus, the Overnight and Open Buy Back closed at an average of 0.75% for the week, juxtaposed with an average 8.7% in the prior trading session.
The Bond Market continues to lag its peers in the fixed income market following persistent profit taking by market players across the curve. We witnessed investors offloading holdings at the longest end of the curve in reaction to a more robust DMO auction Calendar in terms of volume, consequently, average bond yield steeped northward by 30bps to 6.73% from 6.44% at the close of trading in the prior week.
The DMO published its Q1:2021 auction calendar, indicating its intent to raise funds via the issuance of bonds in the range of NGN360bn – NGN450bn in a bid to fulfil its mandate to bridge the fiscal deficit of NGN5.7trn on behalf of the Federal Government of Nigeria (FGN).
The DMO in Q1:2021 will re-open the 2027 maturity after shelving it in 2020. As expected by the DMO in light of the expanding fiscal deficit, the Q1:2021 calendar is 11.1% and 87.5% larger than what it offered in Q1:2020 and Q4:2020 respectively.
However, we expect the robust supply in the first quarter will be met with huge demand as we anticipate over NGN500.0bn inflow from FGN bond coupons alone, hence yield may remain entrenched at current levels or improve marginally as the DMO will also be mindful of the marginal rates to keep cost of funds in check.
Furthermore, in light of spiking inflation (Dec 2020: 15.8%), we expect investors bid range to widen, thereby forcing marginal rates in the PMAs northward.
The FX market traded actively in the week as the Naira weakened in the Investors and Exporter Window (I&EW), closing at NGN394.7/USD from NGN393.5/USD in the prior week, representing a decline of NGN1.17/USD.
Similarly, the Naira weakened in the Parallel Market against the USD to settle at NGN475.0/USD from NGN472.0/USD in the prior week. In terms of turnover, the FX market turned active (+99.9% WoW) in the I&EW from a soft session last week to an average of USD82.6mn from USD35.3mn in the prior session.
Ahead of the Bond PMA auction, we expect activity to slow down and more tilted towards sell-offs as investors will await the auction result to have more clarity on the direction of the bond market. Moreover, we expect bond coupon payment of NGN240.4bn next week which is significantly higher than the anticipated DMO offer of NGN150.0bn.