SAT 27 FEB, 2021-theGBJournal- The overnight (OVN) declined by 14.17ppts w/w, to 6.3%. The contraction was due to a boost in system liquidity following inflows from OMO maturities (NGN423.79 billion), FAAC disbursements (NGN335.35 billion) and FGN bond coupon payments (NGN49.75 billion). The preceding outweighed the debits for CBN’s weekly FX and OMO (NGN325.46 billion) auctions, as well as the NTB net (NGN19.04 billion) issuance.
We expect tighter liquidity in the system next week, as funding pressures from CBN’s weekly auctions are likely to outweigh expected inflows from OMO (NGN132.11 billion) maturities.
Treasury bills
Just as we envisaged, the Treasury bills secondary market ended the week on a bullish note, following the system liquidity boost. The average yield across all instruments declined by 21bps to 3.9%.
Across the curve, local demand for OMO instruments sustained the space’s bullish performance, as the average yield fell by 27bps to 6.1%.
At this week’s OMO auction, the CBN maintained stop rates across the three tenors and sold NGN325.46 billion worth of bills to market participants. Elsewhere, trading was weak in the NTB secondary market (average yield pared by 2bps to 1.5%) as focus shifted towards the NTB PMA in anticipation of higher rates.
The CBN offered a total of NGN128.22 billion – NGN20.37 billion of the 91-day, NGN55.85 billion of the 182-day, and NGN51.99 billion of the 364-day – in bills the auction and ultimately allotted NGN147.27 billion.
The auction stop rates were 2.00% (previously 1.00%), 3.50% (previously 1.50%), and 5.50% (previously 4.00%) on the 91D, 182D and 364D bills, respectively. The auction was oversubscribed with a subscription level of NGN192.05 billion, translating to a bid-to-cover ratio of 1.4x (previous auction: 1.2x).
We expect yields to trend higher in the coming week as local investors sell instruments to meet funding obligations amidst the anticipated liquidity squeeze.
Bonds
The Treasury bonds secondary market turned bullish, as the average yield declined by 18bps to 9.2%. We attribute the drop to improved market liquidity following the payment of the FEB-2028 bond coupon and speculative demand from investors in anticipation of higher yields.
Across the curve, average yield at the short (-79bps) and mid (-1bp) segments contracted, as investors took positions in the MAR-2025 (-181bps) and FEB-2028 (-12bps) bonds, respectively. In contrast, investors continued to upwardly re-price long (+19bps) dated instruments, with major sell-offs recorded on the MAR-2036 (+69bps) bond.
With the current happenings in the market, we expect the uptrend in yields to be maintained as the DMO seeks to securitize the Ways and Means balance.
Overall, while pressure points remain that could pressure yields, we expect yields to touch double-digit on the average over the short term.
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