Expected System Liquidity Boost to Sustain Bullish Performance: T-Bills and FGN Bonds Indicative Rates [06-Aug-18]

August 6, 2018 BusinessTrumpet

In line with our expectation, the T-Bills market reversed its bearish performance last week on the back of improved system liquidity from matured bills as well as Federal Accounts Allocation Committee (FAAC) inflows. Consequently, average rates across tenors declined 7bps W-o-W to close at 11.3% on Friday as increased demand across the short, medium and long-term maturities particularly the 03-Aug-18 (-65bps), 25-Oct-18 (-12bps) and 03-Jan-18 (-28bps) tenors buoyed the bullish performance.

At the Primary Market Auction (“PMA”) auction last week, the Apex bank offered N215.6bn and investors exhibited a bullish sentiment as all instruments were oversubscribed particularly the 364-day instrument which was 1.8x oversubscribed reflecting investors’ preference to lock in funds at the longer end of the curve. On the back of the over subscription, the stop rates at the auction were 10.0% (unchanged), 10.4% (vs. 10.5%) and 11.3% (vs. 11.5%) for the 91, 182 and 364-day instruments respectively.

Please see detailed results below:

Auction Date	01-Aug-18	01-Aug-18	01-Aug-18
Allotment / Issue Date	02-Aug-18	02-Aug-18	02-Aug-18
Tenor	(91-Day)	(182-Day)	(364-Day)
Offer Amount (N)	9,541,924,000	69,565,347,000	136,522,566,000
Total Subscription (N)	9,626,924,000	69,639,347,000	238,898,367,000
Allotment (N)	9,541,924,000	69,565,347,000	136,522,566,000
Range of Bid Rates (%)	9.6500 – 10.2000	10.2000 – 11.0000	11.0000 – 18.2000
Stop Rates (%)	10.0000	10.4000	11.3000
Allotment Ratio	1.0x	1.0x	0.6x
Subscription Ratio	1.0x	1.0x	1.7x

In a bid to mop up excess system liquidity (N511.0bn opening balance as at Thursday last week), the Apex bank conducted an OMO auction offering N600.0bn- (N200.0bn and N400.0bn for the 91 and 203-day maturities respectively). The shorter tenor was 29.5% subscribed (N58.5bn subscription vs. N200.0bn offered) while the longer tenor was 76.0% subscribed (N304.0bn subscribed vs. N400.0bn offered) as more investors positioned at the longer end.

Please see indicative rates for today below:

Maturity	Tenor (Days)	Rate (%) p.a.	Yield (%) p.a.
20-Sep-18	45	8.30	8.39
1-Nov-18	87	9.30	9.51
13-Dec-18	129	10.80	11.23
17-Jan-19	164	10.90	11.46
21-Feb-19	199	11.10	11.82
OMO Auction	211	11.30	12.05

Rates are valid till 1:45pm today (06-Aug-18)
*Please note that the minimum subscription for T-Bills is N100,000.00

This week, an inflow of N452.0bn from OMO maturity is expected to bolster system liquidity on Thursday. On the back of the expected system liquidity boost and absence of PMA, we expect the CBN to conduct more frequent OMO auctions to mop up excess liquidity.

Also, we anticipate a bullish performance in the T-Bills secondary market consequently leading to a slight moderation in yields across the curve. Investors are advised to position in short to medium term bills as we anticipate more attractive rates closer to the 2019 general elections.

FGN Bonds Market Update: Bullish Sentiment Drags Average Yield 15bps W-o-W
Last week, the FGN bonds market was largely quiet at the start of the week as offshore investors sold off positions in the benchmark 5 and 10-year bonds. The bearish sentiment was reversed on Friday on the back of renewed buying interests by local investors particularly in the Feb-2028 (-6ps) and June-2019 (-20bps) maturities. Consequently, average yield across maturities declined 15bps to close at 13.5%.

This week, we expect a sustenance in the bullish run triggered by domestic investors on the back of anticipated improvement in system liquidity.

Please see below indicative bond rates for today:

Bond	Tenor (Years)	Yield (%)	Coupon (%)	Implied Price (N)
Feb-20	2	12.95	15.54	103.50
Jul-21	3	13.40	14.50	102.60
Jan-22	4	13.25	16.39	108.55
Mar-24	6	13.52	14.20	102.58
Jan-26	8	14.03	12.50	93.04
Mar-27	9	13.92	16.29	111.64
Feb-28	9	14.27	14.00	98.61
Jul-34	16	14.05	12.15	88.01
Mar-36	18	14.05	12.40	89.29
Apr-37	19	14.08	16.25	114.14