N176bn Nigeria treasury bills auction tests investors’ reaction to monetary easing expectation

Treasury bills with a total value of N176 billion with varying tenors are being put up for auction by Nigeria’s central bank today, Wednesday 14 February 2018, the monetary authorities have announced. The bills comprise of N6 billion, N30 billion and N140 billion with tenors of 91-day, 182-day, and 364-day respectively.

Analysts at Cordros Capital say they expect demand for the bills to be active at the auction on the back of relative improvement in system liquidity amid inflow from the N47.12 billion coupon payment on the February-2020 bond on Tuesday, in addition to the expectation of maturing open market operations (OMO) bills of N89.08 billion on Thursday.

Apart from the impact of liquidity position, analysts said the activities at the auction will further reflect investors’ reaction to rising expectation of monetary easing, moderating inflation, healthy participation from the offshore community, and the government’s new debt management strategy, particularly with the recent announcement of plans to refinance maturing bills using proceeds of the proposed $2.5 billion Eurobond, already approved by the National Assembly.

“Overall, we expect stop rates on the 91, 182, and 364-day bills to come in lower relative to the previous auction,” the analysts further said.

At the previous auction, demand remained solid as a result of budgetary allocations to state and local governments and coupon payments with yields declining on the 91-day (12.00 percent; previously 12.10 percent), 182-day (13.65 percent, previously 13.75 percent) and 364-day (13.70 percent; previously 13.79 percent) bills.

Specifically, the apex bank allotted N6.10 billion, N69.57 billion, and N177.22 billion of the respective bills, which were jointly 1.4 times oversubscribed.

Similarly, activities were bullish in the secondary market, supported by improved liquidity, as average yield declined by 35 basis points (bps) week-on-week to 13.81 percent. Yields moderated at the short (-98 bps) and mid (-13 bps) ends of the curve, while yields came under pressure at the long (+4bps) segment.

However, last week, proceedings turned broadly bearish, with average yield expanding by 62 bps w/w to 14.3 percent, with selloffs in all sessions of the week as outflows from OMO auctions and foreign exchange sales tightened liquidity position. Yields expanded across all ends of the curve – short (+143 bps), mid (+33 bps), and long (+20 bps) – as investors reduced holdings in the 55DTM (+207 bps), 153DTM (+67 bps), and 265DTM (+68 bps) bills respectively.

This week, investors have remained bearish in the secondary market, as average yield expanded by 6bps to 14.50 percent against last week’s close of 14.43 percent; driven by sell-offs of the 58DTM (+55 bps), 135DTM (+28 bps), and demand for 324DTM (-35 bps) bills. Overall, average yield has increased by 68 bps to 14.50 percent since the last auction.

Compared to two weeks ago, yields on bills with similar maturities of 91 and 364-day have contracted by 2 bps and 10 bps respectively, while the 182-day bill has increased by 89 bps.