• Bond Prices Fall on Profit-taking over Fears of Rate Cut

The prices of FGN bonds traded on the over-the-counter (OTC) segment fell for most maturities last week, amid renewed profit-taking as investors cash in on recent gains.

There are also projections that an interest rate cut by the Central Bank of Nigeria (CBN) may be in the offing in the short-term.

According to a report by Cowry Asset Management Limited, the 20-year, 10% FGN JUL 2030 paper, the 7-year, 16.00% FGN JUN 2019 and 5-year, 14.50% FGN JUL 2021 debts, all depreciated week-on-week by N0.50, N0.13 and N0.24 respectively; while corresponding yields rose to 16.61% (from 16.47%), 16.89% (from 16.80%) and 16.51% (from 16.41%). However, the 10-year, 16.39% FGN JAN 2022 debt, remained unchanged.

On the other hand, FGN Eurobonds traded on the London Stock Exchange appreciated in value across all the maturities amid sustained bargain hunting. The 10-year, 6.38% JUL 12, 2023 and 5-year, 5.13% JUL 12, 2018 bonds appreciated by $0.69 (yield fell to 5.39%) and $0.05 (yield fell to 3.49%) respectively.

“This week, we expect bond prices to appreciate at the OTC market on the back of expected ease in financial system liquidity,” Cowry Asset Management predicted.

But in their own assessment of the performance of the bond market last week, analysts at Afrinvest West Africa Limited, pointed out that in line with the recent trend in the domestic bond market, investor interest stayed soft last week and performance was largely bearish as average yield across benchmark bonds trended northwards on four of five trading sessions.

Last Wednesday, the Debt Management Office offered N35 billion of the JUL 2021 (Subscription: N10.4 billion, Allotted: N9.2 billion), N50 billion of the MAR 2027 (Subscription: N19.9 billion, Allotted: N17.5 billion) and N50 billion of the APR 2037 (Subscription: N33.4 billion, Allotted: N29.4 billion) instruments at marginal rates of 16.8%, 16.8% and 16.9% respectively. “Unsurprisingly, all Instruments were undersubscribed as lower system liquidity as well as investor preference for higher yield but short tenored treasury bills and open market operations (OMO) bills weighed on investor appetite at the Primary Market Auction.

The Lagos-based investment bank showed that sentiment on African Eurobonds was largely bullish last week as prices rose and yields fell on all trading instruments under our coverage, save for the Ghana 2017(+49 basis points), Ghana 2024 (+5 basis points) and South Africa 2019 (+2 basis points) instruments. The Gabon and Zambia Eurobonds received the most interest as average yield on respective country bonds declined 40 basis points and 16 basis points respectively week-on-week.

But the Kenya 2024, Zambia 2024 and Nigeria 2023 Eurobonds remained the best performing among their peers with year-to-date return of 10.3%, 8.8% and 8.5% respectively.

However, performance of Nigerian Corporate Eurobonds was mixed but largely bullish as investors were bearish on FBN Holdings’ 2021 (up 2 basis points) and Diamond 2019 (up 71 basis points).

Also, the Zenith 2022 (-34 basis points) received the most buying interest followed by the Access 2021(-4 basis points), FBN Holdings 2020 (-11 basis points) as well as the UBA 2022 (-6 basis points).

“Relatedly, Access and UBA released largely impressive H1:2017 results during the week and we believe this could have driven interest in the banks’ Eurobonds.

“On a year-to-date basis, Diamond 2019 (+21.3%) remains the best performing on price basis followed by FBN Holdings 2021 (+19.1%) and Fidelity 2018 (+13.8%),” according to the Afrinvest report.

Interbank Market

During the week, money market rates moved in tandem with liquidity dynamics. The CBN conducted OMO auctions on all trading sessions of the week while the DMO held its monthly bond auction which squeezed N56.1 billion from the system.

As a result, money market rates – open buy back (OBB) and overnight – rose on four of five sessions while system liquidity remained in deficit all week despite FAAC inflow and maturing OMO bills repayment of N652.23 billion and N95.7 billion respectively.

At the start of the week, OBB and overnight rates stood at 18.0% and 18.6% respectively and further rose to 24.2% and 25.2% on Tuesday due to a larger system deficit of N78.6 billion against N59.7 billion on Monday.

Liquidity levels further deteriorated on Wednesday to a deficit of N221.5 billion due to a series of outflows (debits from the bond and OMO sales). Consequently, Afrinvest in the report, showed that OBB and overnight rate spiked 67.5 and 70.8 percentage points to 91.7% and 96.0% respectively.

However, rates moderated on Thursday to 9.5% (OBB) and 10.1% (overnight), owing to OMO maturity of N95.7 billion which more than offset the N58.3 billion debit in OMO sales, although system liquidity remained in a deficit.

At the close of week, OBB closed flat at 12.0% week-on-week whilst overnight rate slid 30 basis points to 12.6% week-on-week.

However, performance in the treasury bills market was mixed last week as average treasury bills rate across benchmark instruments closed higher in three of five sessions.

The week started off on a quiet note, as average yield at the end of trade closed four basis points lower to settle at 18.5% while rates further declined two basis points on Tuesday to 18.4%. By Wednesday, average treasury bills rates inched a marginal one basis point higher to 18.5% and remained flat on Thursday. Average yield however closed the week at 18.5%, indicating a marginal four basis points hike week-on-week. This week, there will be an OMO maturity of N101.2 billion.

Analysts at Afrinvest anticipated that the CBN would continue with its OMO mop-ups in order to guide interbank rates to target levels.

Forex Market

In the just concluded week, the CBN injected $195million into the interbank foreign exchange market. In the wholesale segment of the market of the interbank market, CBN auctioned $100 million, $50 million went to the small and medium enterprises (SMEs) and the invisibles segment received $45 million.

Despite the inflows, the naira depreciated week-on-week (w-o-w) at the interbank and Bureau De Change market segments by 3.13 per cent and 0.27 per cent to N330/$ and N367/$ respectively.

However, the naira strengthened at the Investors & Exporters Forex Window (I&E FXW) by N0.42 to N359.56/$. At the parallel market, the local currency remained stable week-on-week.

Dated forward contracts at the interbank OTC segment suggested likely appreciation of the naira amid relatively high foreign exchange reserves – external reserves stood at $31.55 billion as at Friday, August 18, 2017.

The spot and 3 months forward contracts depreciated week-on-week by 0.03 per cent and 0.23 per cent to N305.80/$ N378.44/$ respectively.

The six months and 12 months however appreciated week-on-week by 0.03 per cent and 0.01 per cent to N398.52/$ and N435.63/$.

“This week, we expect CBN’s continued intervention in the interbank segment, increasing investor confidence and consistent build-up in external reserves to lead to further stability of the naira/dollar exchange rate,” analysts at Cowry Asset Management stated.

Liquidity for Non-interest Instruments

In a bid to aid liquidity management and deepen the financial system, the Central Bank of Nigeria last week introduced two new financial instruments known as – Funding for Liquidity Facility (FfLF) and Intra-day Facility (IDF), at its window, for access by non-interest financial institutions (NIFIs) under its regulation.

This central bank listed some of the features of the FfLF to include that it would provide liquidity facility on overnight basis only and to be terminated on next business day.

Some other features include: “Authorised non-interest financial institutions to provide eligible securities to the CBN as collateral for the facility. The value of the collateral to be maximum of 110 per cent of the value of the facility. For example, if a NIFI wishes to take a FfLF of N10 billion, it would be required to provide eligible security collateral worth N11 billion.

“The CBN shall specify acceptable collaterals from time to time. These shall include, but not limited to the following securities: CBN safe custody account (CSCA) deposit, CBN non-interest note (CNIN), CBN Asset-backed security (CBN-ABS). Sukuk (that has received status from the CBN, warehouse receipts as provided in the CBN Act 2007, and any other collateral designated by the CBN that does not contravene the CBN guidelines for NIFI’s operations,” it explained.

On the other hand, it listed some of the features of the IDF to include that the CBN would provide an IDF for settlement, on same day business while authorised NIFI are expected to provide eligible securities as collateral for the facility.