Pressure mounts on NTB yields as CBN resells N113bn maturing bills

Analysts have predicted that the depreciation of the naira in the parallel market will continue due to back-log of unsatisfied demand for dollars.

They also cited rising dollar demand owing to increased economic activities due to reduction in   COVID-19 induced restrictions.

The naira depreciated further in the parallel market last week by N2 to N467 per dollar on Friday from N465 per  dollar the previous week, though the national currency was stable at N386 per dollar in the Investors and Exporters (I&E) forex  window.

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These factors, according to analysts at Financial Derivatives reduce the effect of the CBN $20,000 weekly sale to bureau de change on the parallel market exchange rate.

Speaking in the FDC Bi-monthly Economic Bulletin issued last week, they said: “The Central Bank of Nigeria, CBN’s retail forex auction and weekly  forex allocation to  Bureau De Change, BDCs are unlikely to stem forex demand pressures due to the growing forex backlog and resumption in more economic activities. This will continue to impact negatively on the exchange rate.

“The impact of increased forex demand could outweigh the effect of the CBN’s $20,000 weekly allocation to BDCs leading to a weaker exchange rate. This will negatively affect industries that are highly dependent on imported inputs.”

Making similarly forecast, analysts at Cowry Assets stated: “In the new week, we expect the exchange rate  to remain stable at the Investors and Exporters (I&E) forex  window and the interbank forex market segment as most foreign exchange forward contracts have settled below N400 per dollar  they were trading at couple of weeks ago amid relative stability in the global crude oil market. “However, we may see increased pressure at the black market amid unsatisfied demand in that segment”.

Meanwhile, the decline in the Nigerian Treasury Bills (NTBs) yields is expected to continue this week when the CBN resells (roll-over) N113.97 billion worth of maturing bills.

Financial Vanguard analysis shows average decline of 178 basis points (bpts) in the stop rate of freshly issued NTBs also knowas Primary Market bills, between January and September this year.

For example, the stop rate on 91-Days NTBs fell by 150 bpts to 2.5 percent in primary market auction conducted by the CBN on September 16th from 4.0 percent recorded in December last year. Similarly, stop rates on the 182 Days and 364-Days bills fell by 215 bpts and 170 bpts respectively to 2.85 percent and 3.84 percent in September from 5.0 percent and 5.5 percent in December.

This trend which started last year, when the stop rates on 91-Days and 182-Days bills fell by 690 bpts and 810 bptsrespectively, is driven by increased demand for TBs, amidst reduction in volume of TBs offered by the CBN. This development was rooted in the December 2018 decision of the Debt Management Office (DMO) to reduce domestic borrowing and increase external borrowing.

The trend was further aggravated by the October 2019 decision of the CBN to ban local investors from participating in secondary market (Open Market Operations, OMO) TBs thus restricting local investors to primary market TBs.

Analysts opined that this trend will persist this week, with the apex bank taking advantage of the huge demand to further cut yields on primary market TBs, when it resells (rollover) N113.97 billion worth of maturing primary market TBs. Making this projection, analysts at Cowry Assets Management Limited stated: “In the new week, T-bills worth N151.97 billion will mature via the primary and the secondary markets which will outweigh T-bills worth N133.97 billion to be auctioned by CBN via the primary market; viz: 91-day bills worth N10 billion, 182-day bills worth N17.60 billion and 364-day bills worth N106.37 billion. Hence, we expect the stop rates of the issuances to decline amid demand pressure.”