Dunn Loren Merrifield analysis of bond market

by | April 18, 2013 11:02 am



During the week under review, we observed a cautious approach following a sell-off and slowdown of market activities; this came on the back of the OMO auctions that occurred throughout the week, the mid-week treasury bills auction, the release of the April 2013 FGN bonds auction offer circular and the expected release of the March 2013 inflation figures.

At the treasury bills auction, N20.16billion worth of 91day bills was offered and sold at the rate of 10.49% against 11.00% at the previous auction, while N43.49billion and N120billion worth of 182day and 364day were offered and sold at the rates of 10.68% and 10.71% respectively against 11.15% and 10.76% at the last auctions. Total subscription during the auction stood at N327.99billion (178.60%) versus N342.33billion at the last auctions. In addition, a total of N75.91billion worth of treasury bills across maturities was allotted on a non-competitive basis.

As expected, liquidity tightening continued during the week as a total of N200.00billion worth of OMO bills with tenors ranging between 98days and 205days was offered while N152.05billion was sold at marginal rates ranging between 11.58% and 12.00%. We observed that cut-off rates remain marginally higher than those at the treasury bills auction, which indicates the sustained high bids being demanded by investors at the OMO auction. This contributed largely to the non-allotment of the 205days bills given the relatively high bids recorded at the auction, which were considerably higher than the expectations of the CBN.

However, speculations regarding the upcoming FGN bond auction and the consequent cautious approach by traders’ led to intraday volatility at the OTC market. This led to a flat market trend towards the end of the week as market liquidity became tighter due to the various OMO bills auctions that took place during the week. The highest increase in yields came from the 1M benchmark security with 69bps, while the next came from the 7Y benchmark with 2bps, the least affected was the 3M which experienced 0.3bps increase. The market is expected to readjust to the outcome of the FGN bond auction scheduled for this week.

At this week’s FGN bond auction, N35billion worth of 7year and 20year bonds each will be issued while N34.80billion worth of 10year bond is expected to be issued. All issues are reopening of the existing benchmark bonds. We equally anticipate OMO bills maturity worth N217.94billion. In view of this OMO bills maturity, we expect the likely increase in system liquidity to be checked by the CBN’s open market operations.