Bonds Market Sell-off Halts after OMO Restriction


Obinna Chima 

Following the Central Bank of Nigeria’s (CBN) recent restriction of individuals, local corporates and non-bank financial institutions from participating in the primary and secondary markets for open market operations (OMO) securities, there was a strong bullish sentiment in the bonds market last week.

As such, the preceding week’s bearish performance came to a halt with average yield in the domestic market trending lower by 113 basis points (bps) to close at 12.87 per cent. 

According to a report by Afrinvest, at the beginning of last week, average yield slumped 20bps. This was sustained on Tuesday and Wednesday as average yield fell by 22 bps and 39bps respectively. 

Also, last Thursday, average yield dropped 33 bps while the bullish streak was ended on Friday, as average yield rose marginally by one basis point.

But the medium-term instruments enjoyed the most buying interest as yields declined 166bps, while yields on short and long-term instruments fell 44 bps and 111 bps respectively. 

Analysts at the Lagos-based investment and financial advisory firm expected that the bullish performance in the bond market would be sustained due to limited investment opportunities.
At the Primary Market Auction conducted by the CBN last Wednesday, instruments worth N132.5 billion were offered, with total subscription of N565.6 billion received. Demand was tilted to the 364-day instrument with a bid-to-cover ratio of 4.7x (Offer: N93.9bn; Subscription: N443.5bn) while the 91-day and 182-day were also oversubscribed at 2.6 times (Offer: N28.0bn; Subscription: N72.4bn) and 4.7x (Offer: N10.6bn; Subscription: N49.7bn) respectively. 

Stop rates closed significantly lower compared to previous auction across tenors at 9.5 per cent, 10.5 per cent and 11.5 per cent for the 91-day (-130bps), 182-day (-50bps) and 364-day (-140bps) instruments respectively. 

The trend was attributed to the sharp reduction in rates to the latest policy of the CBN on OMO restriction.

Furthermore, instruments at the Sub-Saharan African  Eurobonds segment sustained the bullish trend as instruments covered posted gains week-on-week, save for the ZAMBIA 2027 which rose by two bps. 

Accordingly, average yield declined 64bps. The ZAMBIA 2024 and 2022 instruments received strong interest as respective yields shed 174bps and 186bps. 

The GHANA 2049 and NIGERIAN 2049 instruments trailed, with their respective yields declining 86bps and 83bps.
Also, in the African corporate Eurobonds space, the bullish momentum persisted as average yield fell across board by 45bps. The MAURITIUS BAYPORT MANAGEMENT 2022 instrument enjoyed the most demand, paring 88bps week-on-week.

The NIGERIA SEPLAT PETROLEUM 2023 and ECOBANK 2024 instruments trailed as yields dropped 72bps and 64bps week-on-week respectively. 

In the interbank naira market, system liquidity stood at N350.2 billion at the start of the week, while the open buy back and overnight rates opened at 4.3 per cent and five per cent respectively, lower than the preceding week’s close of six per cent and 6.9 per cent. 

Last Thursday, the open buy back and overnight rates trended higher to 4.6 per cent and 5.3 per cent respectively despite improved system liquidity due to an OMO maturity of N358.9 billion. 

By the close of the week, open buy back and overnight rates closed at three per cent and 4.1 per cent respectively, as system liquidity settled at N1.2 trillion.

The CBN also conducted an OMO auction worth N330 billion on Thursday, slightly below same day’s maturity. 

“Despite the restrictions we alluded to earlier, demand stayed strong with total subscription of N447.1 billion, although this was concentrated on the 362-day,” it revealed.

“In the coming week, we expect sustained bullish run in the secondary market as investors maintain interest due to recent regulatory action,” it stated.

The CBN continued its interventions in the forex market this week to maintain exchange rate stability.

Accordingly, the external reserves maintained its downtrend, declining 0.6 per cent ($255.1 million) to $40.5 billion from $40.7 billion the preceding week. 

“Weak oil prices and declining Foreign Portfolio Investment (FPI) inflows continue to cloud the prospects of accretion to external reserves,” it added.

The CBN Spot rate opened the week at N307/$1 and closed the week at the same rate, depreciating five kobo week-on-week from N306.95/$1 last week. The naira remained flat at the parallel market, trading at N360/$1 throughout the week. 

“At the Investors & Exporters’ (I&E) forex window, the NAFEX rate opened the week at N362.09/$1 and closed at N362.75/$1 on Friday, depreciating 64 kobo week-on-week from N362.11/$1,” the report.