Maturing N213bn OMO bills may dampen N95bn bond issues

THE financial market is not excited that there will be an inflow of N213 billion into the system from Open Market Operations (OMO) maturing bills this week because it is afraid that plans by the Debt Management Office (DMO) to issue a N95 billion bond this Wednesday and the Central Bank of Nigeria (CBN)’s resolve to mop liquidity will neutralize the impact.

The DMO plans to raise N95 billion through bond issuances this Wednesday. The 5-year (15.54% FGN FEB 2020), 10-year (14.20% FGN MAR 2024) and 20-year (12.1493% FGN JUL 2034) papers will be offered in re-openings, with N35billion, N30billion and N30billion respectively proposed.

Also, analysts at Cordros Capital are concerned that the recent run of yield expansion is gradually opening opportunities for bargain hunting for T-Bills. The market therefore may witness some demands which could bring down yields in the week ahead.

Price correction in the equities space (on account of profit taking on recent rallies) and the need to lock into safer instruments as the elections draw closer could as well be bullish for T-Bills.

Analysts acknowledge that stocks’ prices are still attractive for long term play, it is also worthy of note that gains seen in the last two weeks have rendered the market vulnerable to profit taking.

With oil prices low and pressures still mounting on the country’s foreign reserves, there is little hope that the naira is unlikely to appreciate much further.

The equities market expanded week-on-week for the third consecutive week in a row, signaling stable investor confidence, or probably a wait-and-see approach in anticipation of corporate releases. Similar to last week, four out of five trading sessions closed on a positive note, while a marginal loss was posted on Thursday. However, the benchmark index advanced 3.14 per cent to close at 31,049.37 points surpassing the 2.54 per cent gain recorded last week, and came on account of the buoyant gain recorded on Friday. The huge return on Friday, one of the biggest, day-on-day this year, came on the back of the 2014 full year results jointly released by two of the top Tier-1 banks —  Guaranty Trust Bank (PAT of +9.6 per cent y/y plus final dividend of N1.50) and Zenith Bank (PAT of +8.6 per cent year-on-year (y/y) plus final dividend of N1.75) on Thursday.

Following the releases, investors shifted focus to the financial services sector, most of which gained maximum points after Friday’s trading. The week’s gain further cut-down the Year-to-Date loss by 300 basis points (bps) to 10.41 per cent, representing a significant improvement from the loss of 20.4 per cent as at February 13.

Inter-bank lending rates responded to the liquidity tightening measures of the CBN as shown by rates movements in the week ended. Through OMO issuances that occurred in four of the week’s five days, the apex bank squeezed a total N182.4 billion off the system. Adding to liquidity pressure was the T-Bill primary auction that held during the week as well as debits for foreign exchange purchases. The average inter-bank rate rose by 51 bps week-on-week (ww) to 11.8 per cent, driven by an 88 bps w/w increase in the overnight rate, and over 50 bps increase in each of the 3-month and 6-month rates. In terms of day-on-movement, lending rates rose last Monday (34 bps) and Tuesday (16 bps), fell by 26 bps in total on Wednesday and Thursday and rose again by 27 bps on Friday.

The T-Bills market was slightly bearish this week as shown by average yield which rose by 16 bps week-on-week to 15.8 per cent. Trading at the secondary T-Bills market has been quite bearish in recent weeks and this can be largely attributed to growing uncertainties in the macro-economy (the exchange rate mainly), insecurity and politics. The stability in the equities market since February 16th may have also resulted to less interest in this treasury bills given the strong return potential (after prices of stocks rocked bottom) offered by the later market. About 77 per cent of the bills that opened the week recorded yield expansions, with sell-offs prevalent in the early to mid-dated maturities. There was a massive demand for the 20-day bill (currently 7 days to maturity) and its 239bps yield contraction reduced the effect of the other bills whose yields expanded. The NTB auction that held during the week was quite surprising as the CBN offered rates that exceeded consensus estimates. The 182-day bill was undersubscribed while both the 91-day and 364-day notes were oversubscribed. For all, the allotments were done at stop rates that were at premium to those of the February 18 2015 auction.

The bond market was quiet this week as depicted by the sluggish movement in yields. Week-on-week, the average yield rose by 3.0 bps to close at 16.1 per cent. Since the 88 bps w/w expansion in the week that ended on 13th February, the bond market has maintained a muted volatility, albeit to the upside, with yield rising by less than 10bps in each of the past three weeks. The biggest activities of this week were recorded in the last two trading days where average yield fell by 29 bps on Thursday and rose by 25 bps on Friday.

Oil companies such as the Royal Dutch Shell and Brass LNG sold dollars in a bid to stabilize the local currency. In another bid to further prop up the Naira, the CBN earlier in the week fixed a rate at which banks could buy dollars from oil companies — at no more than N2 spread to their clearing rate. Nonetheless, the apex bank has reiterated its stance to stabilize the naira by various measures necessary. The Naira however regained losing streaks against all currency pairs tracked, recording gains of 0.48 per cent, 0.87 per cent and 1.26 per cent on the US Dollars, pounds and Euro respectively, to close at N198/$, N300.57/£ and N216/€. This can be attributed to the dollar sales carried out by oil companies during the week thereby increasing liquidity.