Bond Auction: Investment analysts see 150bps marginal rate increase

FIXED Income investment analysts at Chapel Hill Denham have projected a 150 basis points (bps) increase in marginal rates at the upcoming bond auction this week as market continues to reprice yields on debts securities.  

The increase yields expectation is coming following extended bearish run at the Nigerian fixed income market last week, noting that there was an increasing risk aversion for long duration bonds.

This happened against the backdrop of a disappointing March 2021 inflation print, which further increase in one-year Treasury bill auction stop rate, and prospect for higher supply of bonds by the Debt Management Office(DMO).  

Meanwhile, analysts are also expecting liquidity in the financial system to improve as N46.8 billion worth of open market operations (OMO) bills is to mature tomorrow.

This week, DMO is expected to offer N150 billion across three maturities, split evenly between the MAR 2027, MAR 2035, and JUL 2045 reopening.

Analysts said the last auction cleared at 10.50%, 11.50%, and 12.00% respectively, noting that odds are in favour of substantially higher marginal rates at the upcoming auction, possibly in excess of 150bps.

Meanwhile, Naira continued to trade within a tight band at all segments of the FX market last week. In the Investors and Exporters Window, the Nigerian local currency weakened by 0.49% against the United States dollar to close at 411.00 on Friday.

However, analysts said the pair went as high as 437.62 based on intra-day volatility, but closed within range of the de-facto peg of 409.00-411.00 on all the trading days.

It was however noted that trading volumes improved in the Investors Window to a daily average of US$59.7 million, up 18% from US$50.4 million from the previous week.

This was mainly due to the resumption of FX sales by the CBN in the window. In the parallel market, the Naira strengthened against the dollar by N3.00 or 0.62% to 482.00.

Despite the recent uptick in external reserves – 1.2% from the beginning of the month to US$35.2 billion, covering 4.9 months of goods and services import cover- and plans to issue Eurobonds, the volume of CBN intervention in the I&E Window  remained paltry.

Rather, the Bank plans to double down on FX restrictions to rebalance the current account. On Friday, the CBN announced via its twitter handle, that sugar and wheat will be included in the list of items not eligible for FX in the official market.

Nigeria is estimated to have spent US$1.3 billion and US$600 million on wheat and sugar importation in 2020, respectively.

“If implemented, the policy will likely push more FX demand to the parallel market, thereby widening the already elevated parallel market premium (17.3%), given local production of both items is less than 5% of domestic demand”, Chapel Hill Denham said.

Furthermore, the firm said the less supportive climate for wheat growers may make the goal of domestic self-sufficiency in wheat production unattained. Accordingly, analysts said they do not expect the restriction to be immediate, but timeline driven.

The Nigerian fixed income market extended its bearish run last week, with increasing risk aversion for long duration bonds, against the backdrop of a disappointing March 2021 inflation print, further increase in one-year Treasury bill auction stop rate, and prospect for higher supply of bonds by the DMO.

Against this backdrop, the benchmark bond yield curve expanded by an average of 132bps to 12.27%. Short term rates traded mixed, as discount rates on the Nigerian treasury bill benchmark curve compressed by an average of 7bps to 3.75%, while the OMO curve expanded by 49bps to 6.65%.

At the NTB auction which held last Wednesday, the DMO, via the CBN, offered a total of N69.56 billion across three maturities.

However, demand was robust, with a total subscription of N153.38 billion, implying a bid-cover multiple of 3.6x (2.2x at the last auction).

Analysts said the DMO took advantage of the strong subscription to frontload issuances, eventually allotting N153.38 billion, split as N12.5 billion of 91-day, N8.8 billion of 182-day, and N132.1 billion of 364-day bills.

Auction result showed that stop rates on the 91-day and 182-day tenors were unchanged at 2.0% and 3.5% respectively, while the 364-day rate expanded further by 100bps to 9.0%.

Bond Auction: Investment Analysts See 150bps Marginal Rate Increase