Appetite for Longer-tenor Treasury Bills Remains Strong

Investor appetite for longer tenor treasury bills remains strong as higher rates were demanded at last week’s auction, amid fears of capital flight ahead of the 2019 general elections.

Analysts at Afrinvest Securities Limited disclosed this in a report at the weekend.

The CBN last week released the treasury bills Calendar for the last quarter of 2018, with the first auction in September carried out during the week.

A total of N136.3 billion hit the system in 91-day (N6.2bn), 182-day (N4 billion) and 364-day (N126.1 billion) maturities with the same amount re-issued at the auctions conducted last Wednesday.

Although the 182-day and 364-day instruments were oversubscribed, the 91-day bill was undersubscribed by over 50 per cent.

Also, the central bank under-allotted the 91-day bill, fully allotted the 182-day bill while the 364-day bill was over-allotted at respective marginal rates of 11 per cent, 12.3 per cent and 13.5 per cent.

From an average closing rate of 12.3 per cent on the preceding Friday, average treasury bills rate closed somewhat flattish on last Monday, but rose by 64 basis points last Wednesday, to 12.9 per cent before increasing further to 13.6 per cent last Thursday. Overall, the treasury bills market was bearish in the week as average rate rose 1.1 percent point week-on-week, to close at 13.4 per cent.

“As investors continue to favour long tenored treasury bills over shorter tenors, we expect higher rates to be sustained into next week’s trading especially as a total of N182.2 billion treasury bills maturity is expected to hit the system with the same amount planned to be rolled over in 91-day (N5.4 billion), 182-day (N8.4 billion) and 364-day (N168.4 billion) maturities,” the report  added.

THISDAY reported last week that despite the turmoil in emerging markets (EMs), which have seen their currencies tumble, Nigeria’s fixed income instruments have remained attractive.

For instance, average yield on Federal Government of Nigeria’s (FGN) Bond in the secondary market closed last Thursday at 15.27 per cent, up from an average of 15.13 per cent it closed the previous day.

Also, the average yield on Nigerian Treasury Bills closed at 14.03 per cent, up from 13.29 per cent the previous day.

In fact, the country’s fixed income instruments have outperformed countries such as Argentina, Turkey, South Africa, Brazil, Mexico, Egypt, South Korea, Philippines and China, in terms of average total return for government’s bonds.

The currencies of the above-mentioned economies have also plunged heavily in the past few weeks, even as the naira has remained stable.

EMs across board have been under pressure since the US Federal Reserve raised interest rates in June. Governments and companies had borrowed in dollars when interest rates were low, and the dollar was weak. Now the dollar is strong and interest rates are rising.

The MSCI Emerging Markets Index of shares is down more than 13 percent in 2018.

To Research Analyst at FXTM, Lukman Otunuga, the simmering trade dispute between the world’s two largest economies had also fuelled global risk aversion while a brutal sell-off in the EM space rattled investor confidence.

He pointed out that with fears mounting over a full-blown trade war triggering global instability and negatively impacting growth, emerging markets especially remain under extreme pressure.

“Throughout the third quarter of 2018, Nigeria has kept afloat with GDP expanding 1.5 per cent during second quarter (Q2) and inflation easing 11.14 per cent. Although the nation’s external reserve dropped to the lowest since March to $45 billion, it still remains at manageable levels.

“With oil prices somewhat supported by geopolitics and the Naira displaying a degree of stability against the Dollar, the outlook looks somewhat encouraging. However, external risks in the form of an appreciating dollar, prospects of higher interest rates and trade tensions could cripple Nigeria’s fragile recovery,” Otunuga explained.

According to Otunuga, although Nigeria’s economic prospects remain tied to oil prices, the upcoming presidential elections could play a leading role in determining if the nation would be able to conclude this year on a firm footing.

He noted that the increased spending ahead of the Febrauary elections would most likely be a welcome development for economic growth.

“If oil prices remain at current levels and support both government revenue and consumption, this may stimulate the recovery further. The largest economy in Africa still has the ability to shock the world stage this year.

“While it is widely known that the cure to Nigeria’s illness – Oil dependency – can be found in economic diversification, the correct steps must be taken while the conditions are still accommodative.

“As the third trading quarter of 2018 slowly comes to an end, global sentiment is likely to remain heavily influenced by U.S.-China trade tensions and the emerging market rout. With the US Federal Reserve expected to raise interest rates this month, the CBN’s effort to defend the naira may be obstructed,” he added.

On his part, a research analyst at Anchoria Asset Management Limited, Mr. Adedeji Adewole, pointed out that compared with other EMs, the Nigerian market remains attractive.

“There have been outflows even before the CBN and the federal government directive that MTN should refund some amount of money to the country, so, that has nothing to do with it.

Meanwhile, money market rates last week responded to the dynamics of liquidity as well as open market operations (OMO) and treasury bills auctions.

Financial system liquidity had closed the preceding Friday at N728.4 billion, with open buy back (OBB) and overnight (OVN) rates settling at 2.8 per  cent and 3.4 per cent respectively, but opened last Monday at N525.1 billion as OBB and OVN closed at 4.2 per cent and five per cent in that order.

The CBN conducted OMO auctions on Monday (N21.7 billion for 199 days at marginal rate of 12.5%) and Tuesday (N300 billion for 198 days at marginal rate of 12.5% and N81.7 billion for 324 days at marginal rate of 13.2%) mopping up a total of N403.4 billion from the system.
“Interestingly, we noticed throughout the auctions that the apex bank stuck to its perceived normal rate for maturities less than 6 months (≤12.5%) as well as maturities higher than six months, but less than one year (≤13.5%).

“Following the T-bills auction that followed on Wednesday, system liquidity opened Thursday at N384 billion – notwithstanding OMO maturity of N240.6 billion that hit the system – while the OBB and OVN rates inched higher to 10.3 per cent and 11.1 per cent respectively.

“The week on week drop in liquidity impacted on the OBB and OVN rates which eventually closed the week at 10.7 per cent and 12 per cent respectively.

“In the coming week, we anticipate that OMO maturity of N218.6 billion will hit the system; this will likely have mild impact on liquidity and may keep OBB and OVN rates at high levels,” the report added.

Forex Market

While global oil prices trended northwards given reduced US output and Iran sanctions, the naira remained stable across all markets in the week.

The CBN maintained its weekly interventions, selling $210 million in the week, to support the naira which traded within tight bands around N360–N366/$1 at both the parallel market and the I &E window.

The naira closed the week at N361/$1 and N363.18/$1 at the parallel market and the I &E window respectively.
Furthermore, activity level in the I & E window improved as total turnover increased by 45 per cent to $2.2 billion from $1.6 billion recorded the prior week while at the FMDQ OTC futures market, subscriptions increased to $4.6 billion from $4.5 billion the preceding week (up 2.1% week-on-week).

The highest increases were recorded in AUG 2019, JUL 2019and FEB 2019 instruments.

“Going forward, we maintain our outlook that the naira will remain stable, as the CBN sustains interventions in the forex market. Although we believe the apex bank’s frequent intervention may weigh on reserves in the coming months, we do not foresee any price shocks in the global oil market that may significantly affect reserves level and thus the ability to defend the local currency,” Afrinvest added.

Bond Market

Bond market activities last week mirrored the prior week, as participation remained tepid with deals and volume pegged at 536 and N220.2 billion respectively, relative to 623 and N335.6 billion in the prior week.

Consequently, the average yield on treasury bonds advanced by 21 basis points week-on-week to 15.26 per cent.

“We adduce the direction of trading to the expectation of market participants that yields will trend upwards in Q4:2018 on political risks, thus preferring to go short.

“This view is supported by the direction of activities in the treasury bills secondary market. Nonetheless, the primary market bond auction scheduled for the 26th of September may incite buying activities, if stop rates peg higher than the current level in the secondary market,” they stated.
In the sub-saharan Africa Sovereign Eurobond space, there was a reversal as yields across instruments pared marginally, shedding 12 basis points week-on-week. There were marginal declines recorded across most instruments, as the average yield pegged at seven per cent at the close of the week’s trading. The largest declines in yield were recorded on the Ivory Coast Sovereign instruments which declined by 28 basis points.

Also, Nigeria’s Sovereign Eurobonds recorded an average yield decline of 23 basis points week-on-week as interest seemingly increased on the attractively priced assets which trade at an average ask-yield of seven per cent.

The increases in yield witnessed in recent times may be linked to a knock-on effect of turmoil across some emerging and frontier markets.

However, given the relative stability and positive outlook (as crude oil output once more reached optimal levels, just as crude oil prices continue an uptrend), the risk profile of the country should improve externally (even with impending elections), and consequently drive demand for these instruments.