Senate re-Introduces South West Development Commission Bill…Bond prices to maintain upward trend

By Babajide Komolafe

TREASURY executives are bracing up for a Central Bank of Nigeria’s Open Market Operation, OMO, directed at excess liquidity mop-up.

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The money market had recorded a huge rise in market liquidity triggered by inflow of N896.78 billion into the banking system last week. The inflow comprised N546.78 billion being part of the statutory allocation released by the Federation Accounts Allocation Committee, FAAC, last week, and N350 billion from matured OMO bills.

While there was outflow of N157.9 billion through the FGN bond auction conducted by the Debt Management Office, DMO,  the absence of OMO bills sale by the apex bank during the week caused market liquidity to rise and close the week at N779 billion. Market liquidity had dropped to N39 billion last Tuesday.

The huge liquidity overhang also triggered a sharp fall in cost of funds with average short term cost of funds falling by 950 basis points (bpts). Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB), lending fell by 936 bpts to 3.7 percent last week, from 13.07 percent the previous week.

Similarly, interest rate on overnight lending dropped by 964 bpts to 4.43 percent last week, from 14.07 percent in the previous week.

Analysts expect the excess liquidity in the interbank market to worsen this week due to inflow of N561.3 billion from maturing TBs. The expected inflow comprise N208.6 billion worth of maturing Nigeria Treasury Bills (NTBs), and N352.7 billion worth of maturing OMO bills.

While projecting that the resulting excess liquidity will lead to further moderation in cost of funds, analysts, however, project that the CBN will sell OMO TBs to mop up part of the excess liquidity.

Analysts at Lagos based Afrinvest Securities said: “In the coming week, maturities worth N561.3 billion will hit the system and as a result we expect money market rates to trend lower. However, we believe the CBN will continue with its liquidity mop-up via OMO sales.”

Speaking in the same vein, analysts at Lagos based Cowry Asset Management Company said: “With anticipated financial liquidity ease in the money market and the effect of the recently disbursed N702 billion by the Federation Account Allocation Committee (FAAC), we expect Nigeria Interbank Offered Rate (NIBOR) to decline.”

Bond prices to maintain upward trend

Meanwhile, bond prices are expected to maintain their upward trend this week, driven by increased demand by local investors seeking investment alternative following their exclusion from OMO sales by the CBN.

Last week, prices of most FGN bonds traded at the over-the counter (OTC) segment rose amid sustained demand pressure.

The five-year, 14.50 per cent FGN JUL 2021 paper rose by N0.32, while the yield dropped to 11.29 percent from 11.53 percent. Also the seven-year, 13.53 per cent FGN MAR 2025 note gained N0.89 while the yield dropped to 12.05 percent from 12.28 percent. In the same vein, the 20-year, 16.25 per cent FGN APR 2037 debt gained N1.91 while the yield dropped 12.81 percent from 13.04 percent. However, the 10-year, 16.29 per cent FGN MAR 2027 bond moderated by N0.92 while its corresponding yield rose to 12.54 percent from 12.37 percent.

This trend, according to analysts at Cowry Assets, will persist this week, helped by the increased system liquidity.

“In the new week, against the backdrop of boost in financial system liquidity, we expect FGN bond prices to rise (with corresponding decline in yields) amid expected buy pressure at the OTC market”, they said.

Reinforcing this projection, analysts at Afrinvest said: “Given that the bonds market has become the ‘go-to’ market for local investors following the restriction of local corporates and individuals from participating in OMO auctions, we expect bullish sentiment to be sustained in the domestic market.”

Naira continues mixed performance in FX markets

On the foreign exchange scene, the naira recorded mixed performance for the second consecutive week in the Investors and Exporters (I&E) window and in the parallel market.

While the naira depreciated by six kobo in the I&E window, it appreciated in the parallel market by 30 kobo.

Data from FMDQ showed that the I&E indicative exchange rate rose to N362.64 per dollar last week from N362.58 per dollar the previous week, indicating six kobo depreciation for the naira.

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According to the naijabdcs.com, the exchange rate platform of the Association of Bureaux De Change Operators of Nigeria (ABCON), the parallel market exchange rate dropped  to N358 per dollar last week from N358.3 per dollar the previous week, indicating 30 kobo appreciation for the naira.

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