Bond, treasury bills yields to increase on back of inflation

… as naira pressure continues on declining foreign reserves

Yields on treasury bills and bond are expected to increase this week following the current short-term in- flation trend and conse- quent depreciation in bond prices, analysts at Cowry Asset Management Limited have said. Headline inflation rose to 9 percent in May 2015, higher than 8.7 percent re- corded in April 2015, accord- ing to the National Bureau of Statistics (NBS).

Meanwhile, pressure on the naira is expected to con- tinue this week on the back of dollar demand by end us- ers amid declining external reserves.

Nigeria’s external reserves declined 1.5 per- cent MTD and 15.4 percent Year-To-Date to berth at $29.2 billion last week.

The Nigerian Interbank Foreign exchange market rate closed on Monday at N199.00/$1.00, a 5 kobo appreciation from previ- ous week’s close.

The lo- cal unit traded at this rate all week except Tuesday (N199.01/$1.00). Hence, the naira appreciated 3bps at the close of the week.

A report by Afrinvest Se- curities Limited revealed that the Bureau De Change (BDC) segment of the market recorded more ac- tivity last week.

The naira traded at N220.00/$1.00 on Monday, indicating a 1.4 percent depreciation from previous week’s close of N217.00/$1.00.

Data from the apex bank’s website in- dicated that the CBN further adjusted the exchange rate peg by 5 kobo from the rate of N196.95/$1.00 the previ- ous week to N196.90/$1.00.

Meanwhile, this is com- ing after JPMorgan extended the removal of Nigeria from its Bonds index on the basis of illiquidity of the currency market by six month.

“We expect the currency market rate to continue to be driven by monetary policy concerns and events in the polity,” Ayodeji Ebo and his team of analysts at Afrinvest, said in a report.

Activity in the bond market was predominantly bearish last week across the benchmark bonds. The off- the run bonds (less liquid bonds) however traded bull- ish in the week as their yields declined by 12bps on the average.

At the close of the week, overall average yields increased by 21 basis points to settle at 15.1 percent rela- tive to the previous level of 14.9 percent.

Afrinvest analysts attri- bute trading activities in the week to investors selling down to probably take ad- vantage of sovereign bond auctions scheduled to for next week.

Also, they opine that investors are exploring the opportunity of higher yields at the medium end of the curve for mostly off- the-run bonds with current average yield of 17.0 percent relative to that of benchmark bonds at 14.2 percent (vs. 17.1% and 13.8%in the previ- ous week).

“We expect the bond market next week to ride on any possible positive eco- nomic pronouncement by the new government.”

The Debt Management Office is set to re-open the issuance of FEB 2020, MAR 2024 and JUL 2034 bond instruments next week to raise N40 bil- lion, N15.2 billion and N25 billion, respectively.

The analysts expect mar- ginal rates to inch higher at the June bond auction as investors anticipate policy direction from the new ad- ministration.

Money market liquid- ity this week was quite low, causing market rates – Open Buy Back (OBB) and Over- night – rates to trend high on all trading days in the week.

With a liquidity opening balance of N132.4 billion and the OMO (Open market Operation) mop-up of N31.9 billion on Monday, OBB and Overnight rates settled at 11.4 percent and 11.8 per- cent, respectively.

HOPE MOSES-ASHIKE