July 17, 2018/Meristem Research
Issue on Offer/Summary
The Central Bank of Nigeria (CBN) is scheduled to hold a Treasury Bills (T-Bills) Primary Market Auction (PMA) on the 18th of July 2018. T-Bills worth NGN178.41bn will mature, while an equal amount is expected to be issued in 91-day, 182-day and 364-day instruments. The CBN is expected to auction NGN5.85bn, NGN26.60bn and NGN145.96bn in the 91-day, 182-day, and 364-day instruments respectively.
Outlook on Yields /Advised Stop Rates
The fixed income environment has been largely bullish since the auction on the 4th of July 2018. Buying pressure filled the market, prevailing on three of five instruments. The 1M tenor has been highly favoured by investors since the last auction, recording a yield decline of 0.66%. This bullish sentiment was also mirrored on the 6M and 9M tenors as the yield on these instruments dipped by 0.02% and 0.16% accordingly. The 3M and 12M tenors however bucked the trend, recording respective yield advancements of 0.08% and 0.20%. The average T-Bills yield has thus dropped by 0.09% to 12.48%, as at July 13th, 2018.
The result from the last primary market auction revealed that investor participation in the market is still strong. All tenors on offer were oversubscribed with respective bid-to-cover ratios of 1.97x, 1.00x and 1.69x on the 91-day, 182-day and 364-day instruments. We also note that the stop rates on 182-Day and 364-Day instruments have been on the upswing, although just marginally.
The Nigerian Bureau of Statistics is expected to release the inflation report for the month of June on the 23rd of June 2018. The inflation rate has been on a decline for sixteen consecutive months, falling to 11.61% in May and we expect it to sink even lower.
Also, the Monetary Policy Committee (MPC) is scheduled to hold its second meeting of the year on the 23rd and 24th of July 2018. We expect rates to remain unchanged, given recent developments in advanced economies. The US Fed has had two rate hikes and is expecting to have two more later in the year. We believe that a cut in the MPC rate will be counterproductive as capital flight will be worsened. Consequently we envisage that rates will still be attractive at this auction.
The T-bills Primary Auction bid holds twice in a month (i.e. every other Wednesday). The above likely stop rates are our estimates and might not necessarily hold true, as the final decision always lies with the CBN based on the auction process.