Expectations of declines in yields to buoy fixed income market

Market analysts say they expect a decline in treasury bills yields to boost the fixed income market this week, noting that investor appetite for longer-tenured instruments to dictate performance.

System liquidity squeeze had forced bearish performance across different segments of the money market last week as market rates – Open buyback (OBB) and overnight (ON) rates – trended higher on four of five sessions.

At the start of the week, the system suffered a liquidity crunch following CBN’s Primary Market Auction and OMO mop up from the previous week, thus OBB and OVN rates trended northwards, rising 4.8 percent apiece to 7.6 percent and 8.2 percent respectively.

However, by midweek, despite a decline in system liquidity (down to N188.0bn from N238.7bn on Tuesday), OBB and OVN rates fell to 7.1 percent and 7.8 percent respectively. On Thursday, rates trended higher to 16.7 percent and 18.9 percent as the CBN mopped up a total of N454.2 billion via OMO auction, which offset the impact of a N290.9 billion maturity on the same day.

The shorter 119-day instrument was largely undersubscribed (offered: N50.0bn, subscription: N2.9bn sale: N2.9bn stop rate: 11.05%) while the longer tenored 231-day instrument (offered: N200.0bn, subscription: N451.2bn, sale: N451.2bn, stop rate: 12.15%) was oversubscribed by 1.3x.

To close the week, OBB and OVN stood at 65.0 percent and 73.4 percent, indicating a 62.2 percent and 70.1 percent increase w-o-w. The results of OMO auctions in the past weeks show that investors continue to favour longer tenured instruments given the moderating yield environment. In the near term, we expect investor appetite for longer tenured instruments to remain upbeat.

In the treasury bills market, the bearish performance from the previous week was sustained into the new week as average rate across tenors closed higher on 4 of 5 days.

Average rate was bullish at the start of the week declining 28bps to 11.4 percent, although by midweek till the end of the week, bearish sentiments returned to the market as average rate across benchmark instruments rose 32bps, 41bps and 76bps to 11.7 percent, 12.1 percent and 12.9 percent on Wednesday, Thursday and Friday respectively. Average rates increased 1.2 percent w-o-w.