The Central Bank of Nigeria (CBN) is expected to continue its open market operations (OMO) mop up as N123.5 billion maturing instrument hits the market this week.
Despite system liquidity in deficit on all trading days of the week, the central bank continued with its daily OMO mop-ups, which took place on four days of the week.
Also, activities in the treasury bills market stayed soft last week on account of the weaker liquidity levels.
A breakdown of the activities during the week by Afrinvest West Africa Limited, showed that on Monday, average rate on benchmark tenors settled at 17.6 per cent, marginally down by one basis point, from the preceding Friday, as buy sentiment on shorter tenored instruments offset the impact of sell offs recorded across longer-dated bills.
It also showed that on Wednesday, there was a treasury bills maturity of N140.9 billion, which was rolled over at the primary market auction (PMA).
Also, the CBN offered N28.1 billion of the 91-day (subscription: N23.3 billion, allotment: N22.8 billion); N23.7 billion of the 182-day (subscription: N33.2 billion, allotment: N24.7 billion); and N89.1 billion of the 364-day (subscription: N502.9 billion, allotment: N168.4 billion) instruments at marginal rates of 13.2%, 16.8% and 17.0% respectively.
It noted that due to lower stop rates at the treasury bills PMA and excess subscription for longer dated bills offered, sentiment was bullish last Thursday as average rate eased to 17.4 per cent, but increased to 17.5 per cent on Friday, down 0.2 per cent week-on-week.
“In the coming week, we expect rates to remain at similar levels as an OMO maturity worth N123.5 billion hits the system, although we believe the CBN will continue with its OMO mop up,” it added.
A member of the CBN’s Monetary Policy Committee (MPC), Dr. Doyin Salami had in his personal comment at the last MPC meeting, released last week, expressed concern that the most challenging issue in the economy was the adoption of a quantitative easing (QE) stance by the management of the central bank.
Salami had said: “It is clear that the CBN has provided ‘piggy bank’ services to the federal government. To prevent the effect of continuous and massive injections of cash to fund the federal government showing up in sharply higher inflation and currency weakness, the central bank now applies ‘special auctions’.
“We thus find ourselves at a point where government borrowing from the CBN is ‘neutralised’ by raising the Cash Reserve Requirement (CRR) of banks, thereby limiting private sector access to credit. In other words, the private sector is deliberately ‘crowded-out’.
“It is ironic that the government, in need of tax revenues – having in the first half of the year accumulated its full-year deficit – is constraining the private sector,” he had added.
But the Chief Executive Officer of Financial Derivatives Company Limited, Mr. Bismarck Rewane, told THISDAY Thursday that the continuous and massive injections of cash by the central bank to fund the federal government’s expenditure through ways and means (or quantitative easing) would help reflate the economy, stressing that there was no easy way out of a recession.
Money Market
Even as liquidity levels stayed tight all through the week, money market rates traded within a tight band between Monday and Thursday but surged on Friday.
On Monday, open buy back (OBB) and overnight rates eased marginally to 10.3 per cent and 11.4 per cent, from 11.3 per cent and 12.2 per cent respectively due to inflow of bond coupon payment which offset wholesale FX auction announced same day.
In addition, the CBN conducted an OMO auction in which a total of N60 billion was offered but subscription stood at N17.6 billion which was allocated in full.
OBB and overnight trended lower on Tuesday to 9.5% and 10.3% respectively as system liquidity improved due to refund from retail SMIS auction. Similar to Monday, another OMO auction was floated in which N60 billion was offered while total subscription and allocation stood at N14.9 billion.
Rates eased further on Wednesday but closed higher on Thursday at 10.7% (OBB) and 11.6% overnight as debits for the treasury bills PMA (N215.9 billion) held midweek and OMO auction (N207.7 billion) offset the impact of the OMO maturity (N140 billion).
Owing to these, the OBB and overnight rates surged to 35% and 38% at the close of the week, up 23.7% and 25.8% week-on-week respectively.
Forex Market
The naira strengthened at all segments of the FX market last week as the CBN sustained pace of intervention while foreign investors positioned for treasury bills sold mid-week.
At the official market, the CBN continued with its weekly SMIS sales worth $100 million for spot and short tenured forwards under 60 days while the official rate improved from N305.95/$1 the preceding Friday to N305.90/$1 last Monday before eventually closing the week at N305.85/$1. This implied a marginal three basis points appreciation week-on-week.
Similarly, at the interbank market, the domestic currency depreciated from N354.99/$1 on Monday to N356.99/$1 on Wednesday, but strengthened to N353.50/$1 by the close of the week, up 0.4% week-on-week.
But at the parallel market, the naira exchanged for N367.00/$1 at the end of the week.
In the FMDQ OTC Futures market, the total value of open contracts fell by US$68.2m to settle at US$2.6bn this week. The SEP 20 2017 instrument worth US$383.3m matured during the week and was replaced with the SEP 26 2018 instrument. The most subscribed instrument is the DEC 27 2017 (US$372.4m) which currently trades at N356.91/US$1.00 while the least subscribed is the MAY 30 2018 (US$52.2m) which trades at N359.41/US$1.00.
Bond Market Review
The bullish sentiment in the domestic bond market which has lasted for two weeks extended to last week’s trading sessions with increased buying interest observed across tenors.
Earlier in the week, market performance was characterised by sell offs across tenors before the trend was reversed by mid-week and sustained till the end of the week. Activity on the first trading the day of the week was soft as average yield across Benchmark bonds opened the week flat at 16.3% (same as the preceding Friday) as buy interest in the JAN 2022 instrument (-8bps) was broadly offset by sell offs in the MAR 2027 (+8bps) instrument. Average yield marginally increased 1bp on Tuesday as sell sentiment on the JUN 2019 (+7bps) and APR 2037 (+5bps) bonds outweighed interest in the JAN 2022 (-5bps) instrument. However, performance was bullish last Wednesday and Thursday due to improved Investor appetite on account of the expectation of lower stop rates at the T-bills PMA executed on Wednesday. Hence, there was increased buying across the yield curve which drove yields 6bps downward on average on Wednesday and a further 15bps on Thursday to eventually settle at 16.1%.
The bullish trend lingered into Friday as average yield closed the week at 16.1%, down 0.5% week-on-week.
“In the coming week we expect to see a bearish performance at the start of the week as investors free up funds to partake in the September Bond auction,” Afrinvest stated.
The bearish performance witnessed across African Eurobonds was sustained last week as US Fed Chairman guided on one additional rate hike in 2017 and released measures to unwind its US$4.5tn balance sheet.
Consequently, yields rose across all trading SSA Eurobonds, save for the GHANA 2017 (-2.6%) and GABON 2017 (-0.4%). The largest sell offs were recorded in the ZAMBIA 2024 (+28bps), ZAMBIA 2022 (+27bps) and SOUTH AFRICA 2019 (+24bps) Eurobonds. The NIGERIA 2023, KENYA 2024 and ZAMBIA 2024 remain the best performing YTD with returns of 9.1%, 8.5% and 8.0% respectively.
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