18 March 2019

Nigeria: Decline in TB Rates to Persist As Foreign Investors Trigger 575% Oversubscription

The steady decline in interest rates on treasury bills, TBs, offer in the primary market since last month is expected to continue this week when the Central Bank of Nigeria, CBN, roll over N48.6 billion worth of maturing bills.

Last week the apex bank sold N89 billion worth of TBs in the primary market at lower stop rates. Stop rate for the 91-Days bills dropped by 15 basis points (bpts) to 10.75 percent from 10.9 percent in the previous auction held on February 27. The stop rate on the 182-Days bills also dropped by five bpts to 12.5 percent from 13 percent in the previous auction, while stop rate for the 364-Days bills dropped by 152 bpts to 12.85 percent, the lowest since August last year, from 14.37 percent in the previous auction in February.

Financial Vanguard analysis of primary market TB auction since January revealed a two month downward trend in rates.

Between the first auction on January 16 and the auction held last week Wednesday (March 13), stop rate on 91-Days bills dropped by 25 bpts to 10.75 percent last week from 11 percent on January 16. Stop rate on 182-Days bills fell marginally by six bpts to 12.5 percent last week from 13.1 percent on January 16. The biggest decline was recorded by the stop rate for 364-Days bills which fell by 215 bpts to 12.85 percent last week from 15 percent on January 16.

The above trend is driven by massive oversubscription (excess demand) for TBs fuelled by foreign portfolio investors seeking to take advantage of the high interest rate regime in the nation's fixed income market.

This is reflected by the 88 percent increase in dollar injection by foreign portfolio investors through the Investors and Exporters (I&E) foreign exchange window, which rose to $3.07 billion in the first two months of the year (January and February) from $1.63 billion in Q4'18.

This massive inflow triggered 532 percent oversubscription in the primary market TBs auction held by the CBN on February 27. The CBN offered and sold N115 billion worth of TBs while total subscription stood at N727.35 billion.

This trend was repeated last week, with the primary market auction recording 575 percent oversubscription. While the CBN offered and sold N89 billion worth of bills, total subscription (investors demand) stood at N600.52 billion.

Confirming this development, analysts at Lagos based Cowry Asset Management Limited said: "Amid demand pressure from the foreign portfolio investors, we saw stop rates fall across tenor days: 91-day, 182-day and 364-day maturities."

They projected that the huge demand for TBs will persist this week when the CBN offers maturing TBs worth 48.6 billion, as well as further moderation in stop rates.

"In the new week, CBN will rollover T-bills worth N48.57 billion, viz: 91-day bills worth N3 billion, 182-day bills worth N8.39 billion and 364-day bills worth N37.18 billion. We expect their stop rates to fall amid buy pressure. Amid the N169.44 billion bills maturing, we expect yields to further moderate given the declining stop rates."

In a bid to mop up the excess liquidity from the unmet demand for TBs in the primary market auction, the CBN on Thursday held secondary market (Open Market Operations, OMO) TB auction, which recorded 23 percent oversubscription. Total public subscription to the N350 billion worth of bills offered by the apex bank stood at N429.5 billion while the apex bank sold N400.48 billion.

In response, cost of funds rose marginally at the end of the week with average short term rates rising by 1.8 basis points (bpts).

Data from FMDQ showed that interest rate on Collateralised (Open Buy Back, OBB) lending rose by 2.0 bpts to 11.17 percent last week from 9.17 percent the previous week. Similarly, interest rate on Overnight lending rose by 1.6 bpts to 11.67 percent last week from 10.08 percent the previous week.

This trend may persist this week in the face of further liquidity mop by the CBN in response to maturing OMO bills worth N169 billion during the week.

The naira appreciated further last week in the I&E window as the nation's external reserves rose to five weeks high of $43 billion on Thursday.

According to the CBN the external reserves recorded a weekly increase of $381 million last week to $42.987 billion from $42.606 billion on Thursday March 7.

The $42.987 billion recorded last week, March 14 represents the highest level since February 6 when the reserves peaked at $42.991 billion. The rise in reserves may be unconnected to the huge dollar inflow from foreign investors through the I&E window since the beginning of the year.

Last week, the volume of dollars traded in the I&E window dropped by 58 percent to $1.7 billion from $4.1 billion the previous week.

However, the naira sustained its upward trend in the market since last month. According to FMDQ, the indicative exchange rate dropped further to N360.18 per dollar last week from N360.42 per dollar the previous week, translating to 24 kobo appreciation for the naira.

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