Increased OMO Mop-Ups by CBN Drive Treasury Bills Average Yield up to 13.5% as PMA Holds this Wednesday; T-Bills and FGN Bonds Indicative Rates

The bullish sentiment in the Treasury Bills (“T-Bills”) secondary market was reversed last week (after two weeks) as the Apex bank increased its frequency of liquidity controls via Open Market Operation (“OMO”) auctions albeit offering only short- and mid-tenor bills. Consequently, average yield across tenors advanced 51bps W-o-W to 13.5% from 13.0% the previous week.

Accordingly, the short- and medium-term instruments increased 101bps and 135bps W-o-W respectively following sell-offs as investors took position in bills offering higher yields at the OMO auctions. The long-term bills also advanced marginally 6bps W-o-W despite sustained demand witnessed for most part of the week.

The CBN offered a total of N900.0bn at the OMO auctions which were conducted on all trading sessions last week save for Wednesday, and successfully mopped up approximately N809.0bn out of a 1.1x over-subscription of N945.3bn. In more details, the medium-term bill had more interest (1.4x bid-to-cover) as N800.8bn was subscribed, against N570.0bn offered. On the other hand, the short-term bill received mild attention with a total of N144.5bn subscription against N330.0bn offered, depicting a 0.4x ratio.

This week, the Apex bank will conduct a Primary Market Auction (“PMA”) on Wednesday to roll over N89.5bn worth of T-Bills maturing on Thursday, across the 91- (N5.0bn), 182- (N14.0bn) and 364-day (N70.5bn) tenors.

Please see a detailed summary in the table below:

We expect this week’s PMA to witness strong demand, especially on the 364-Day instrument, hence we anticipate lower moderation in rates as witnessed in OMO auctions conducted last week. Additionally, we believe the CBN may continue the trend of regular liquidity mop ups (N26.4bn positive as at Friday last week) albeit at a slower pace and offering only short and medium bills. Thus, further raising demand for long-term bills. Investors are therefore advised to take full advantage of the primary offerings specifically the 364-day bill. The stop rate of the long- term bills at the PMA is expected to guide rates of similar bills in the secondary market.

Going into the first trading week of March, monthly FAAC disbursements of approximately N609.0bn and OMO maturities of N229.6bn are scheduled to hit the financial system which we expect to be controlled by the once-a-week OMO auction and CBN’s wholesale FX interventions. We anticipate sustained interest from both foreign and domestic investors, amid system liquidity (N999.2bn short as at last Friday). As a result, we expect further compression in yields especially medium to long term maturities except CBN ramps up the frequency of OMO auction.