Dunn Loren Merrifield analysis of bond market

During the review week, the general direction of activities was influenced largely by the issuance and maturity of OMO bills, the issuance of a special OMO and a renewed interest from both domestic and foreign investors.

At the OTC market, there was a renewal of interest in government securities notwithstanding the marginal increase in prices by c.25 basis points on the average. However, the momentum decelerated later in the week as a result of profit-taking and the sale of special OMO bills necessitated by the maturing OMO bills.

However, in our opinion, the slight decline in prices may not be sustainable given that offshore investors still remain keen observers of the Nigerian bond market. We therefore expect this to offset the effect of any profit-taking in the weeks ahead in view of the anticipated impact of the increasing presence and influence of foreign investors in the domestic bond market.

As highlighted in our note last week, liquidity tightening was sustained all through the week via open market operations. A total of N250 billion worth of OMO bills with tenors ranging between 79 days and 133 days was offered, while c.N100.80 billion was sold at marginal rates ranging between 11.50 percent and 11.99 percent. We equally observed the low sales recorded during the auction; we believe this is due to investors’ resolve to take full advantage of the OMO window for optimising returns and the regulator’s unwillingness to meet the relatively higher rates submitted at the auction. Our view is hinged on the significant difference between the amounts offered and sold at the auction, which is a departure from previous trends.

At the “special OMO auction” held mid-week, N500 billion was on offer while subscription was c.N419.02 billion. The latter amount was sold at a fixed rate of 12.75 percent with a tenor of 289 days. The features of the special OMO bills include: 1) they are non-tradable, and; 2) they cannot be used for REPO, among others.

In our opinion, the issuance of this special OMO bills was to counter the effect of the very low allotment of OMO bills, which occurred earlier in the week given the CBN’s resolve to sustain tight liquidity levels.

In the week ahead, we expect that treasury bills worth c.N183.65 billion will be offered to the market. We equally anticipate that treasury and OMO bills worth c.N183.65 billion and c.N206.89 billion, respectively, will mature.

Consequently, we see a continuation of the ongoing liquidity tightening, especially in view of the events of the review week and the week ahead.