Assessing Weekly Performance of Money, FX, Bond Markets

The financial system during the week remained awash with liquidity following the inflow of N1.1tn that came in on Friday (09/10/2015) which brought the opening balance on Monday to N1.2tn. Consequently, the Open Buy Back (OBB) and Overnight Rate (O/N) opened the week at 0.8% and 1.2% respectively. The liquidity condition stayed upbeat but gradually moderated to N756.4bn on Wednesday as the OBB and O/N firmed at 0.8% and 1.1% in that order. However, with the inflow of N283.7bn in OMO repayment on Thursday, liquidity level improved to N1.0tn while the OBB and O/N remained stable at Wednesday level. At the close of trade on Friday, average liquidity level closed at N986.0bn while the average OBB and O/N rates settled at 0.8% and 1.1% accordingly.

Investors' appetites for short term securities continue to gain traction as evident in the trajectory of T-bills yields in the last few weeks. Average yields during the week pegged at 9.1% after declining to 8.3% from the open of 9.5%. Bullish sentiments on the shorter term T-bills instruments drove down short term yields to an average of 5.8% from 6.5% in the previous week. In the coming week, T-bills maturity worth N138.0bn is expected to hit the financial system while the CBN will be conducting a Primary Market Auction (PMA) of the same amount in 91-day, 182-day and 364-day instruments. We expect the level of liquidity in the system to remain upbeat in the coming week while we opine that T-bills rate will continue to respond to short term macroeconomic manifestations.

Foreign Exchange Market
The foreign exchange market at the interbank remains relatively stable at the CBN's peg with an average of N198.48/US$1.00. During the week, the Naira depreciated against the Dollar by 0.3% to settle at N198.92/US$1.00 against the previous week's level of N198.36/US$1.00. The Apex bank remains committed to its resolve to defend the local currency against the greenback amid the plunge in global oil prices and the shaky external reserves.

Between August 31st and October 14th, the external reserves has consistently declined daily losing 4.0% after having accrued up to US$31.3bn post-the ban of 41 items. During the week also, the reserves depreciated 0.5% to settle at US$30.1bn. This development in our view is connected to the demand pressure at the interbank and the CBN's blatant commitment to keep the domestic currency strong.

At the BDC/Parallel segment of the market however, the Naira firmed at N225.00/US$1.00 for most part of the days of the week though it depreciated slightly to N225.50/US$1.00 on Thursday. In our opinion, the true state of the market for FX will continually be pictured by the BDC/parallel market pending when the interbank can reflect the real demand-supply dynamics.

Bond Market
The bond market continued its bullish trend in the current week as yields across maturities and classifications further trended downward in response to clearer macroeconomic signals following the clearance of some ministers by the Nigerian Senate during the week. Average yields during the week declined by 43bps to close at 14.1% from 14.5% in the previous week. Most activities in the bond market in the week were witnessed across benchmark bonds in line with huge liquidity in the system which seem to be impacting significantly on yields.

The Debt Management Office (DMO) during the week conducted October 2015 bond auction which re-issued a total of N80.0bn in line with its earlier plan. The result of the auction, which was carried out on FEB 2020 and MAR 2024 instruments, further buttresses the fact that the local bond market remains principally driven by domestic investors. The FEB 2020 instrument was planned to raise N40.0bn but was 157% oversubscribed with a clearing rate of 13.11% while the MAR 2024 instruments auctioned to raise N40.0bn was also 105% oversubscribed at a marginal rate of 13.87%.

Analysis of the sovereign yield curve shows the true condition of the market as yields across tenors moderated relative to the previous week's level as near flatness is noticeable at the short to medium term end of the curve with a slight inversion at the long end of the curve. Given the current market condition, we reiterate the opportunities noticeable along the yield curve at the longer end of the curve in benchmark bonds (JUL 2030 and JUL 2034) and off-the-run bonds (NOV 2028, MAY 2029 and NOV 2029) given their average yield of 16.6% against overall average of 14.5%. The bond market experienced a convergence in yield at 15.5% between August and September, 2015; if this situation repeats itself, the longer tenured bonds will offer optimal return to investors in our view.