Analysts See Rates Repricing as DMO Auctions N180 Billion Bond
Patience Oniha, Director-General, Debt Management Office
Analysts See Rates Repricing as DMO Auctions N180 Billion Bonds
Investment analysts at Chapel Hill Denham have said that odds are in favour of higher marginal rates at the upcoming bonds auction schedule for this week. In the fixed income space, rates on fixed securities have remained cold as the headline inflation rate tempered two consecutive months. During the week, Nigeria’s Debt Management Office (DMO) is expected to offer up to N180 billion across three maturities, split evenly between the MAR 2027, MAR 2035, and Mar 2050 reopening.In a report, Chapel Hill Denham said the last auction cleared at 12.93%, 13.80%, and 14.00%, respectively with expectation for upward repricing this week.Again, sentiments were broadly mixed in the fixed income space last week as yield compressed at the long end of the curve, due to investors’ inclination towards duration, occasioned by a second straight moderation in headline inflation.Chapel Hill Denham said short-duration apathy drove a slight expansion in short-term rates, especially in the OMO segment.Patience Oniha, Director-General, Debt Management Office
Precisely, from a week ago, yields across the benchmark bond curve dipped by an average of 25 basis points to 12.78%, while the OMO benchmark curve rose by an average of a basis point to 9.24%.“We highlight that the Nigerian Treasury bills curve was flat at an average of 6.14%”, Chapel Hill Denham’s analysts said.Amidst pressure on liquidity, a cumulative maturity of N61 billion comprises N46 billion from open market operations and N14.8 billion from Nigerian Treasury bill hit the financial system, with the CBN and the Debt Management Office (DMO) conducting rollover actions on Wednesday and Thursday.At the treasury bill auction on Wednesday, fixed income analysts said average stop rates compressed by 8 basis points to 5.13% from 5.21%, single-handedly driven by the 364-day tenor that shed 24 basis points.Relative to the offered size of N14.84 billion, Chapel Hill Denham’s analysts stated that total investor subscriptions reached N281.74 billion, translating to a bid to cover ratio of 19.0x, up from 3.6x.Meanwhile, the DMO allotted only N30.58 billion.Elsewhere at the OMO auction, the Central Bank of Nigeria (CBN) sold N17.3 billion worth of OMO bills across three maturities : 89-day: N3.0 billion; 159-day: N4.3 billion; 348-day: N10 billion.Analysts noted that the auction bid-to-cover ratio printed at 3.7x, saying the pattern of subscription was similar to the Treasury bill auction held on Wednesday as investors mainly oversubscribed the 348-day bills.The stop rates cleared the same as the previous level (89-day: 7.0%, 159-day: 8.5%, 348-day: 10.1%) as investors gun for a higher return on funds.Recall that headline inflation moderated by 19 basis points to 17.93% year on year in May 2021, with most of the gains stemming from the positive impact of the high base from the prior year.“We understand that this is the second consecutive slide in headline inflation since August 2019. Looking ahead, we guide that Inflation will likely sustain a decelerating path.“Our prognosis is largely hinged on the positive pass-through from last year’s high base. Risk to our view remains an absence of price shock relating to the removal of fuel subsidy or a hike in electricity tariff”, Chapel Hill Denham said.That said, the investment firm noted that with inflationary pressure looking set to sustain moderation, it believes the CBN will now focus strictly on the economic growth mandate going forward.“We expect N15 billion worth of OMO bills to mature on Tuesday. Meanwhile, all eyes will be on the bond auction scheduled to hold on Wednesday, June 23”, analysts said.The investment firm stated that the DMO is expected to offer up to N180 billion across three maturities, split evenly between the MAR 2027, MAR 2035, and Mar 2050 reopening.It noted the last auction cleared at 12.93%, 13.80%, and 14.00%, respectively, adding that odds are in favour of higher marginal rates at the upcoming auction.In a related development, Chapel Hill Denham said despite the 12% increase in liquidity at the Investors and Exporters window, with average daily turnover printing at $141 million – the first advancement in three weeks, Naira saw a 5 basis point depreciation to N411.Meanwhile, in the parallel market, analysts noted that Naira appreciated by 1.6% or N8.0 last week to N490.00.“For us, we suspect the appreciation in Naira reflects the CBN’s recent policy to increase the amount of foreign exchange allocated to banks to meet personal and Business Travel, Medical, and school fees needs.“Although the quantum of increase is currently sketchy, we believe this is a positive step to narrowing the wide spread between the IEW and parallel market rates.“However, we maintain our view that the CBN will have to make further adjustments in the NAFEX rate to engineer a lasting solution to the liquidity challenges faced at the I&E window”, Chapel Hill Denham analysts added. Analysts See Rates Repricing as DMO Auctions N180 Billion Bonds
