Low yield on fixed income assets to persist despite recent spike in rate
Analysts at the investment banking group, United Capital Plc review the recent spike in the yield on fixed income assets at the domestic debt market and conclude that the recent rate reversal would be short-lived while the low yield environment will persist.
On Wednesday, the Central bank of Nigeria (CBN) held Treasury Bills Primary Market Auction (PMA) wherein the stop rate for the 364-day bill was reversed to 1.13 percent compared with the 3.2 percent at the previous auction.
While the 182-Day bill also closed marginally lower at 0.5 percent against the 0.6 percent it was sold at the previous auction.
We observed that the 91-Day bill rose to 0.048 percent from the previous 0.010 percent. This is despite the relatively small size of the offer of about N7 billion, divided into N2.0 billion, N2.0 billion and N3.0 billion from the short to the long end of the curve respectively.
Expectedly, the level of oversubscription was overwhelming, at 9.1x, 5.1x and 31x for the 91-day, 184-day and 364-day paper, respectively.
Clearly, the indication of a possible earlier-than-expected rate reversal was observable in the bid range, as the upper range surged to 10 percent from the previous 3.2 percent.
Interestingly, the DMO also held a bond auction today. As observed in the bid range for NTB, marginal rates closed higher at 6.9 percent compared with 5 percent and 7.0 percent against 5.9 percent for the FGN 2035 and FGN 2045 paper respectively, driven by increased bid quotes from dealers.
Although the total primary market offers (both at the NTB and Bond Auctions) were meager in relation to overall system liquidity, it is clear that the CBN may have set the ball for the reversal of rates rolling, with dealers expectedly taking a cue from last week’s auction.
Yet, the reduction in the stop rate on the 364-Day bill also suggests that the CBN is not clear on its forward guidance or market signaling, considering the meager size of the offer and wide bid range.
Overall, we think that the rate reversal at the bond auction will further spur bearish sentiment in the bond market as dealers move to exit their position in long-dated bonds especially those bought at a premium.
Also, the equity markets may see another day of sell-off as observed last Thursday. Give or take, we maintain our position that the recent spike in rates will be short-lived and the low yield environment will most likely persist amid significant levels of liquidity in the market.