Bearish Trend Sustained as Average Rate Advanced 19bps to 11.7%

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August 20, 2018/Afrinvest Research

The bearish sentiment in the T-Bills secondary market persisted last week due to further sell-offs by offshore players on the back of current pressures in the Emerging markets. Moreover, institutional investors also repositioned ahead of Primary Market Auction (PMA) on Wednesday. Consequently, average rates across the curve advanced19bps W-o-W to close at 11.7%. Rates on short-term instruments closed marginally up, inching 4bps W-o-W while medium and long-term instruments advanced 26bps and 30bps respectively.

In line with our PMA expectation (detailed result below), the 364-day bill was 1.8x oversubscribed leading to an 8bps decline in the stop rate. However, the 91 and 182-day stop rates remained unchanged.

Auction Date 15-Aug-18 15-Aug-18 15-Aug-18
Allotment / Issue Date 16-Aug-18 16-Aug-18 16-Aug-18
Tenor (91-Day) (182-Day) (364-Day)
Offer Amount (N) 3,384,180,000.00 10,000,000,000.00 20,000,000,000.00
Total Subscription (N) 3,384,180,000.00 10,050,001,000.00 36,033,914,000.00
Allotment (N) 3,384,180,000.00 10,000,000,000.00 20,000,000,000.00
Range of Bid Rates (%): 9.8000 – 10.0000 10.0000 – 13.7500 10.5000 – 15.0000
Stop Rates (%): 10.00 10.40 11.22
Allotment Ratio 1.0x 1.0x 0.6x
Subscription Ratio 1.0x 1.0x 1.8x

Furthermore, in an OMO Auction on Thursday, the CBN also offered N450.0bn to mop up excess system liquidity caused by inflow of maturing funds. This was however undersubscribed with 75.3% allotted for the 91-day instrument (N100.0bn offered vs N 24.7m subscribed) and 38.6% (N 350.0bn offered vs N 128.9bn subscribed) on the 203-day instrument. This may be partly attributed to the earlier than usual auction announcement (9:10am) causing some investors to miss out.

Please see secondary market indicative rates for today below:

Maturity Tenor (Days) Rate (%) p.a. Yield (%) p.a.
20-Sep-18 31 8.20 8.26
01-Nov-18 73 10.00 10.20
13-Dec-18 115 11.00 11.39
03-Jan-19 136 11.10 11.58
21-Feb-19 185 11.40 12.10
OMO Auction 240-300 11.30 12.21

We expect the first few trading sessions of this week would be dominated by buying interest on the back of buoyant system liquidity N 661.1bn (as at Friday last week). Moreover, N 364.3bn worth of maturing OMO is scheduled to hit the financial system on Thursday further spurring system liquidity. Thus, we believe the CBN would more actively mop up funds through its intermittent OMO auctions.

Investors are therefore advised to take advantage of opportunities in mid-term bills that advanced last week as well as the OMO issuances.

FGN Bonds Market Update: Average Yield Rose 47bps higher W-o-W

Last week, the performance in the FGN Bonds secondary market was triggered by continued sell-offs by offshore players intensified by the Turkey currency crises. In addition, ahead of the Bond auction on Wednesday, local investors sold off bonds in anticipation of higher marginal rates. As expected, stop rates across the 3 instruments (Apr-23, Mar-25 & Feb-28) closed higher at (14.39% vs. 13.69%, 14.60% vs. 14.00% & 14.69%vs. 14.30%) in that order.  However, the bids were unfilled due to higher quotes from investors resulting to 0.4x subscription (N39.7bn allotted vs N90.0bn offered).

Consequently, average yield on benchmark bonds improved 47bps W-o-W to close at 14.5% thus sustaining the bearish trend.

Please see indicative bond rates for today below:

Bond Tenor (Years) Yield (%) Coupon (%) Implied Price (N)
Feb-20 2            13.55             15.54                   102.58
Jul-21 3            14.40             14.50                   100.19
Jan-22 4            14.10             16.39                   106.04
Mar-24 6            14.30             14.20                     99.60
Jan-26 8            14.80             12.50                     89.82
Mar-27 9            14.90             16.29                   106.57
Jul-34 16            14.75             12.15                     84.17
Mar-36 18            14.90             12.40                     84.53
Apr-37 19            14.80             16.25                   109.05

On the back of the weak level of demand for FGN bonds and anticipated sell-offs on emerging market instruments, we believe the bearish trend may be sustained for yet another week. Notwithstanding, we advise investors to take advantage of instruments with attractive yields especially those trading at significant discount to par which present opportunity for capital gain in the short to medium term.

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