Treasury yield expected to rise on interest rate hike

Treasury bills yield is expected to trend upwards this week at the secondary market, following a hike in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN).

Treasury yield is the effective annual interest rate that the government pays on one of its debt obligations, expressed as a percentage. In other words, Treasury yield is the annual return investors can expect from holding a government security with a given maturity.

In the secondary market for treasury bills last week, performance was bullish as average yield declined across benchmark tenors by 9bps week-on-week (w/w) to 6.2 percent according to a report by Afrinvest Securities Limited.

The CBN last week raised its monetary policy stance by 50 basis points to 18.5 percent from 18 percent in March 2023.

On Wednesday, the CBN rolled-over maturing T-bills worth N180.4 billion across three instruments (91-day: N9.6bn; 182-day: N1.8bn; 364-day: N168.7bn).

Investors’ demand at the auction was strong as bid-to-cover ratio printed at 8.45x as against the prior auction of 5.70x.

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Notably, the 182-day instrument received the most buying interest with a bid-to-cover ratio of 410.39x, while the ratios of the 364 and 91-day bills were 4.42x and 3.37x, respectively.

Compared to the previous auction, stop rate on the 91, 182, and 364-day instruments dipped by 221bps, 145bps, and 100bps respectively to 2.3 percent, 5.0 percent, and 8.0 percent despite MPR hike during the week.

The report noted that system liquidity was robust at N237.2bn last week against the previous week ‘s close of N70.7bn. The robust performance was aided by primary market maturities worth N180.4 billion hitting the system and higher opening balances of banks (up 505.2% w/w).

Consequently, Open Repo (OPR), or Open Buy Back, a money market instrument used to raise short term capital, and Overnight (OVN) rates fell 213bps and 238bps w/w respectively to 12.8 percent and 13.3 percent.

At the Foreign Exchange(FX) market, the report noted that Naira depreciated across FX market segments. At the close of the trading week, Brent crude oil price rose 1.7 percent w/w to settle at $76.85/bbl.

“We attributed the gain to the unexpected drawdown in US crude inventories and the prospect of further OPEC+ production cuts in the next meeting,” analysts at Afrinvest said.

Meanwhile, on the domestic front, Nigeria’s foreign reserves marginally fell 4bps ($14.3m) w/w to $35.2bn (23/5/2023).

At the parallel market, the base currency (dollar) appreciated 1.1 percent w/w against the price currency (Naira) to N772.00/$1.00. While at the Investors’ & Exporters’ (I&E) window, the base currency (dollar) rose 0.3 percent w/w against the price currency (Naira) to N464.51/$1.00.

The foreign exchange market turnover, which reflects the activity level in the I&E Window declined 9.3 percent w/w to $649.1bn from $716.0bn in the previous month.