Dunn Loren Merrifield analysis of bond market

by | April 25, 2013 2:16 pm

  The direction of activities during the review week was influenced largely by the FGN primary market bond auction, the release of the March 2013 inflation figures and the persistent issuance of OMO bills.

At the monthly federal government bond auction, N104.8billion worth of 7year (N35billion), 10year (N34.80billion) and 20year (N35billion) bonds were offered and sold. In addition, N11.30billion worth of 7year was sold on non-competitive basis. In reaction to the slowdown of the activities of offshore investors, rates during the auction closed higher than expected – this is unprecedented in recent months. This is as the 7year closed at 11.50% while the 10year closed at 11.20% against 11.08% during the previous auction. The 20year bond closed at 12.60%. All securities were reopened. However, subscription levels during the auction stood at N133.34billion representing 127.23% of the offer. We however note that the auction recorded the lowest subscription level so far in 2013 considering the number of bonds that were reopened

In our opinion, the stop rates at the auction reflect the levels at which the DMO is willing to issue the securities on offer given the low subscription levels and high bid rates.

The OTC bond market recorded choppy movements in yields as the market recorded intraday volatility across tradable maturities. Earlier in the week, activities were subdued as traders maintained a cautious position in anticipation of the outcome of the FGN bonds primary auction and the release of March 2013 inflation figures. This trend was sustained till midweek when a reversal occurred following the release of the auction result on Thursday; rates subsequently moved northward in alignment with the outcome of the auction. This trend, if sustained, may be the signal for investors in the short term as rates trend toward attractive levels once again.

As a result of the week’s activities, the most affected security was the 6M benchmark with c.166bps while the least affected was the 20Y with a c.7.0bps change. In our opinion, the yield appreciation may not be sustainable as there will be a reversal as soon as there is a significant demand coming on the back of expected renewed inflow.

As highlighted in our note last week, liquidity tightening was sustained all through the week via open market operations. A total of c.N200.0billion worth of OMO bills with tenors ranging between 146days and 183days were offered, while c.N158.4billion were sold at marginal rates ranging between 11.95% and 12.00%. We equally observed the low sales recorded during the auction; this could be attributed to the relatively lower liquidity levels observed during the week.

In the week ahead, there will be a treasury bills issuance of about N140.62billion across all maturities. We equally expect the redemption of Treasury and OMO bills worth c.N140.92billion and N214.53billion respectively. We therefore expect system liquidity to increase during the week, which will prompt a liquidity mop up by the monetary authority via open market operations.