Money market:Elevated system liquidity drives rates downward





Last week, in the money market, inter-bank rates traded lower for most of the week with improved liquidity attributable to matured bills from the Open Market Operations (OMO) and treasury Bills.

Particularly, Overnight (OVN) and Open Buy Back (OBB) rates, operated from 16.8 per cent and 16 per cent it closed the previous week to
5.9 per cent and 5.1 per cent respectively.

In the money market last week, interbank rates trended lower on three of five trading days due to improved system liquidity attributable to OMO & T-bills maturities which offset OMO mop-ups by the Apex bank.

At the start of the week, Open Buy Back (OBB) and Overnight (OVN) rates closed at 16.0 per cent and 16.8 per cent respectively, from 11.4 per cent and 12.4 per cent recorded the previous Friday as system liquidity declined to N79.5 billion. On Tuesday, consequent on the retail foreign exchange (FX) Secondary Market Intervention Sales (SMIS) refund, rates trended lower as system liquidity increased to N286.0 billion; hence, OBB and OVN rates closed at 8.4 per cent and 9.1 per cent respectively. Finally, OBB and OVN rates fell to 5.1 per cent and 5.9 per cent respectively as system liquidity settled at N661.8 billion.

On Wednesday, the CBN at the primary market auction (PMA) issued; 91-day (Offer: N5.8bn; Subscription: N9.4 billion; Sale: N5.8 billion), 182-day (Offer: N3.5 billion; Subscription: N38.1 billion; Sale: N3.5 billion) and 364-day (Offer: N112.5 billion; Subscription: N586.6 billion; Sale: N112.5 billion) instruments at a marginal rate of 10.8 per cent, 11.0% and 12.9 per cent respectively compared with previous rates of 11.1 per cent, 11.6 per cent and 13.2 per cent. All instruments were oversubscribed by 1.6x (91-day), 10.9x (182-day) and 5.2x (364-day). On Thursday, following the inflow from OMO maturities worth N464.0 billion, the CBN conducted OMO auction worth N430 billion to mop-up excess liquidity in the system. As a result of stronger appetite for higher yields, there was weak investor interest across shorter tenors. The 91-day (Offer: N30.0 billion; Subscription: N14.3 billion) and 182-day (Offer: N50.0 billion; Subscription: N36.3 billion) instruments were undersubscribed by 0.5x and 0.7x respectively while the 364-day (Offer: N350 billion; Subscription: N1.1 trillion) instrument was oversubscribed by 3.1x. The OMO instruments were issued at marginal rates of 11.6 per cent (91-day), 11.8 per cent (182-day) and 13.4 per cent (364-day).

In the secondary market, the performance was mixed albeit positively skewed as rates across benchmark tenors trended lower on three of five trading days. The week started on a bearish note – due to low system liquidity – as average rate across tenors settled at 11.93 per cent, up 8bps from 11.87 per cent recorded the previous Friday.

On Tuesday and Wednesday, sentiment was bullish as average rate fell 14bps apiece to settle at 11.91 per cent and 11.89 per cent respectively. Following that, average rate rose 20bps on Thursday, and closed the week on a bullish note, down 36bps due to OMO maturities worth N464.0 billion and PMA repayment worth N121.9 billion. Consequently, the average rate across the market declined 4bps W-o-W to settle at 11.87 per cent.
This week, it is expected that the CBN will sustain its OMO auction given that OMO maturities worth N338.5 billion will impact system liquidity levels. Also, we envisage that elevated system liquidity levels would continue to drive rates lower in the secondary T-Bills market.

Bonds market

Last week, the Debt Management Office (DMO) successfully completed the listing of FGN N15.0bn Green Bond Series II on the Nigerian Stock Exchange. The seven-year bond was issued at coupon rate of 14.50 percent and is due to mature on June 13, 2026. The bond is aimed at addressing environmental challenges and fostering sustainable financing in Nigeria.
In the domestic bonds market, the bearish momentum was sustained as average yield rose 48bps to settle at 14.7% W-o-W. The market started the week with a bullish performance as yields fell on Monday (-3bps), Tuesday (-6bps) and Wednesday (-8bps) but ended the week on a bearish note as yields rose 27bps and 37bps on Thursday and Friday respectively. Across the term structure, the long-term instruments enjoyed the most buying interest as yields declined 15bps while yields on the medium-term instruments fell 7bps. Finally, the short-dated instruments recorded a bearish performance as yields surged 566bps as the FGN 7.0 per cent 23-OCT-2019 instrument approaches maturity.

In the Sub-Saharan Africa (SSA) Eurobonds segment, the trend remains the same as all instruments that we track posted gains W-o-W except for the ZAMBIA 2027 that rose 2bps. The ZAMBIA 2024 and 2022 instruments led the gainers with yields shedding 183bps and 195bps respectively. Similarly, the NIGERIA 2043 and KENYA 2049 instruments trailed again with 83bps and 88bps drop in yields respectively.

In the African corporate Eurobonds space, the bullish momentum persisted as yields declined across board. The MAURITIUS BAYPORT MANAGEMENT 2022 instrument enjoyed the most demand, paring 88bps W-o-W. The NIGERIA SEPLAT PETROLEUM DEV 2022 and FIDELITY BANK PLC instruments trailed as yields dropped 73bps and 58bps W-o-W respectively. We expect frontier and emerging market instruments to remain attractive in the coming weeks on the back of continued easing in advanced economies.

Foreign exchange market

As the price of crude oil continues to approach new support levels and dollar inflows from Foreign Portfolio Investors (FPIs) decline steadily, Nigeria’s external reserves has recently been on a downward trend. Unsurprisingly, external reserves declined 0.9 per cent to $41.0 billion (on Wednesday) from $41.4 billion on Wednesday, previous week. The CBN spot rate opened the week at N306.95/$ but closed the week at N306.90/$,  appreciating 5kobo W-o-W from N306.95/US$1.00 last week. At the parallel market, the exchange rate traded flat all week at N360.00/$ while at the Investors’ and Exporters’ (I&E) FX Window, the NAFEX rate opened the week at N362.53/$ and closed the week at N362.21/$,  depreciating 8kobo W-o-W from N362.13/US$1.00. Activity level in the I&E Window declined 24.8 per cent to $936.1 million.
At the FMDQ Securities Exchange (SE) FX Futures Contract Market, the total value of open contracts settled at $10.6 billion, up $108.8 (1.3 per cent) from $10.4 billion previous week. The OCT 2020 instrument (contract price: N365.50) received the most buying interest in the week with additional subscription of $5.7 million which took total value to $30.1 million. On the other hand, the JAN 2020 instrument (contract price: N362.96) was the least subscribed, with an additional subscription of $0.5 million for a total value of $1.4 billion. In the coming week, we expect rates to trade within similar levels across the various FX segments as the CBN sustains its weekly intervention.

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