The overnight lending rate moderated by 733 bps w/w to close at 10.08%, amidst inflows from (1) matured OMO bills (NGN228.95 billion), (2) FAAC disbursements to state and local governments (c. NGN340 billion), (3) Paris Club refunds (undisclosed), and (4) I&E window FX purchases by the CBN, all of which supported system liquidity during the week.
The CBN increased the spate of its OMO auctions this week in order to mop-up the excess liquidity, selling a total of NGN808.96 billion over four auctions.
Next week, inflows from matured OMO bills (NGN212.73 billion) and bond coupon (NGN51.20 billion) will bolster system liquidity. However, liquidity mop-up and forex intervention by the CBN are likely to exert upward pressure on the overnight lending rate.
Treasury bills
The treasury bills market was bearish as yields retraced from the significant bullish sentiments which characterized the previous week, following the CBN’s increased OMO activity. Average yield widened 51 bps to 13.49%.
Yields expanded at the short (+101 bps) and mid (+135 bps) segments, following selloffs of the 69DTM (+217 bps) and 160DTM (+223 bps) bills. Yield at the long (+7 bps) segment also expanded but by a significantly smaller margin, as the absence of a long tenored OMO offering by the CBN at all its auctions, sustained demand at that end of the curve.
Yields are expected to be pressured next week, as the CBN is expected to maintain its aggressive liquidity mop-ups.
At the NTB auction scheduled for next week, the CBN will offer NGN89.50 billion – NGN5.00 billion of the 91-day, NGN14.00 billion of the 182-day, and NGN70.50 billion of the 364-day – worth of bills to the market.
Bond
Proceedings in the bond market were similarly bearish, following a slowdown in demand from foreign investors and profit taking by local players.
As a result, average yield widened by 30 bps w/w to close at 14.24%. Sell pressure was spread across the short (+43 bps), mid (+20 bps), and long (+27 bps) segments, with respective yield on the JUN-2019 (+134 bps), FEB-2028 (+45 bps), and APR-2037 (+41 bps) bonds, respectively.
The DMO issued a revised issuance calendar for Q1-19, indicating (1) a reduction in the offering of the FEB-2028 (10-year) bond, from a range of NGN45-NGN50 billion to NGN15-NGN25 billion, as the bond, which has an outstanding value of NGN693.69 billion, is likely to be phased out this month.
The MAR-2025 (7-year) which was previously excluded from the upcoming March auction will now be on offer (NGN35-NGN45 billion).
Our theme on the bond market favours modestly lower yields in the medium term, anchored on (1) near term moderation in inflation, (2) a resurgence in FPI inflows, and (3) likely softening in short term rates.
Foreign exchange
The foreign reserves bucked its downward trend as the CBN recorded reserves accretion of USD289.74 million w/w to USD42.61 billion.
Even as the apex bank paused its traditional weekly FX intervention, the naira remained resolute, appreciating by 0.17% to USD360.42 at the I&E window, but traded flat at NGN360 in the parallel market.
Elsewhere, total turnover at the I&E window declined by 32%% to USD2.68 billion with 86.03% of trades executed within the NGN360-369/USD band.
At the forwards market, USD/NGN appreciated in the 1-month (+0.12% to NGN363.39) and 1-year (+0.23% to NGN404.06) contracts, but depreciated in the 3-month (-0.17% to NGN369.66), and 6-month (-0.12% to NGN381.51) contracts, respectively.
Going forward, acknowledging the risk associated with crude oil prices, we believe the blend of still healthy oil inflows, robust FX reserves and possibility of FPI resurgence in the near team, guides our views for currency stability for the rest of the year.
Source: Cordros Capital
