The Central Bank of Nigeria (CBN) will hold a Treasury Bills (T-Bills) Primary Market Auction (PMA) on the 9 th of June 2021. At the PMA, Existing T-Bills worth NGN4.74bn, NGN7.82bn, and NGN78.71bn across the 91-day, 182-day, and 364-day instruments, will mature, and be rolled over.
Outlook on Yields
At the last PMA, stop rates at the short and medium end of the treasury bills curve (91 and 182 days) remained unchanged at 2.50% and 3.50% but declined by 10bps on the long end (364 days) to 9.65% (vs.9.75%). Subscription for the 91- and 182-day bills was significantly lower than amount offered as Investor preference was heavily skewed towards the 364-day bills. This was evidenced by the increase in bid to cover ratio on the 364-day bill to 1.99x from 1.72x. Overall, the government successfully raised more than the total amount offered as it shifted its interest more towards the 364-day bills. Thus, the increase in average bid to cover ratio (to 1.58x from 1.38x) implied stronger investor appetite at the auction. Meanwhile, although investors continued to press for higher yields, strong investor demand provided the CBN enough impetus to offer a lower rate on the 364-day instrument.
Rates at the coming auction will be influenced by investor demand and the outlook for inflation, FGN’s revenues and debt serviceability. On the one hand, investor demand is expected to remain robust with higher bid ranges due to persistent inflationary pressure. On the other hand, FGN finances and debt burden remain pressured despite increase in crude oil prices as crude oil production and exports are still subject OPEC+ restrictions. We therefore expect rate reductions (especially on the mid-to-long end of the curve) or in the best case, a retention of last PMA rates.
In the secondary market for T-bills, the average yield has increased since the last PMA to 6.25% as of 7 th June 2021 (from 5.48% on the day of the previous PMA) indicating a bearish run as selloffs persist. Although we expect inflation rate to moderate further due to the effect of the effect of a high base, it remains well above yields in the fixed income market leaving real rate of return firmly in the negative territory. Therefore, we expect selloffsin the secondary market to continue over the near term as investors seek higher yields from the primary market and from relatively riskier alternatives which have strong fundamentals. In view of the above, we advise rates which aim to achieve a balance between the goal of maximizing investment returns and that of having a successful bid. The recommended stop rates for the respective instruments are listed below: