T-Bills Yield Decline as CBN Debits on Banks Pressure Short-term Rates
Treasury Bills average yield decline as Central Bank (CBN) imposed cash reserve ratio debits on banks for failing to meet 65% loan to deposit ratio. The apex bank policy implementation on shortfall relating to its 65% loans to deposit target caused a run on financial liquidity, thus push interbank rates upward.
During the week, the fixed income market remains unimpressive with persistent yield declining.
The market has been cold, and quiet in recent times due to low issuance, robust financial system liquidity and oversubscription in the primary market auction in August – putting pressure on 364-day treasury bills spot rate in particular.
Though on the high side of the curve, the headline inflation rate has been on the decline in the past four months, the situation investment analysts attribute to base effect after 19 months consecutive rise.
Speaking to robust liquidity seen in the financial system, some analysts see this as a downside to upward yield repricing and lower issuance would probably tighten returns further in the second half of the year.
In the money market, interbank rates were slow down for the most part of the week but pressure from Central Bank cash reserves ratio debit on Nigerian banks reversed earlier gain by the weekend.
The overnight lending rate closed at 13.5% on Friday after a 500 basis point increase when compared with the previous week close, according to Cordros Capital market report. The rate remained in the single-digit territory for most of the week following a higher net liquidity position supported by open market operations (OMO) maturities.
Analysts report showed that the week’s average net liquidity position printed at N373.87 billion, in addition to N57 billion inflow from OMO maturities, thus stood far above last week close of N43.46 billion.
However, analysts said the eventual rates jerked up was driven by debits at the latter part of the week for cash reserve ratio on banks for failing to meet the 65% loan to deposit ratio and the CBN’s weekly FX and N50 billion OMO auctions.
In the coming week, analysts at Cordros Capital expects the overnight lending rate to remain relatively range-bound as expected inflows from OMO maturities worth N170.00 billion is likely to offset funding pressures for CBN’s weekly auctions.
Meanwhile, the Treasury bills secondary market traded with bullish sentiments following higher demand on the back of the improved system liquidity.
Thus, analysts said the average yield on the instrument contracted by 13 basis points to 5.4% as of Friday. Across the market segments, the average yield at the Nigerian Treasury Bills segment declined by 34 basis points to 4.6% but expanded by 8 basis points to 6.1% at the OMO segment.
On Thursday, the CBN sold N50.00 billion worth of OMO bills to market participants and maintained the stop rates across the three tenors, as with prior auctions.
On 82-days OMO bills came with a 7.0% stop rate, 152-days bills at 8.5%, and 327-days bills were allotted at a 10.1% stop rate. Also, Cordros Capital analysts said the CBN also rolled over Special Bills maturities worth N4.20 trillion at 0.5% for three tenors of 30, 60 and 90 days.
“In the coming week, we envisage lower average yields as market participants take positions ahead of further declines in auction stop rates. Also, we expect the Nigerian Treasury Bills market to trade quietly as the CBN is set to roll over N138.17 billion worth of instruments”, analysts estimated.
In the Bonds space, bullish sentiments persisted in the secondary market as investors continue to cherry-pick attractive instruments across the curve, analysts said.
Specifically, it was noted that the average yield declined by 11 basis points to 11.0%. Across the benchmark curve, the average yield declined at the short (-10bps), mid (-9bps), and long (-12bps) segments following investors’ interest in the JAN-2022 (-53bps), FEB-2028 (-15bps) and MAR-2035 (-35bps) bonds, respectively.
Read Also: PFAs withdrawal, CRR Debits Tighten Financial System Liquidity
Next week, Cordros analysts maintain expectations of lower average yields in the face of limited supply and deliberate efforts by the Debt Management Office to moderate borrowing costs for the government.
T-Bills Yield Decline as CBN Debits on Banks Pressure Short-term Rates
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