Experts Predict Higher Yields This Week On Tight Liquidity, Shrinking Foreign Reserves
Market operators have predicted increase in yields across market segments this week driven by sharp decline in system liquidity and accelerated draw-down on foreign reserves.
In the money market last week, the overnight (OVN) rate increased by 8 basis points to 17.3 percent due to already tight liquidity situation.
Rates appreciated across the Forwards market with the 1-month contract appreciating +0.2 percent to N445.94 per dollar.
Also, the 3-month contract rose +0.3 percent to N452.02 per dollar, while the 6-month contract rose +0.2 percent to N467.08 per dollar while the 1-year contract rose the most at +0.7 percent to N491.70 per dollar.
Market players said the overnight rate would trend further north because N10 billion inflow from OMO (open market operations) maturities is insufficient to keep system liquidity afloat.
“We expect the OVN rate to trend northward, as the thin inflow from OMO maturities (N10 billion) may not be sufficient to keep system liquidity afloat,” said analysts at Lagos based Cordros Research.
Market tight liquidity is direct outcome of recent increase in Cash Reserve Ratio (CRR) to 32.5 percent by the CBN. CRR is the minimum amount of cash banks must keep in CBN vaults as reserve.
About 48 hours after increasing CRR on Tuesday, Sept. 27, the apex bank had debited all the banks thereby mopping up excess system liquidity.
CBN had said that its aggressive hike in interest rate (15.5%) and CRR (32.5%) was a two-pronged measure to fight inflationary pressure that hit 20.52 percent in August.
In addition, the CBN maintained its defense of the local currency by supplying foreign exchange to the market at rate pegged between N435 to N436 to the dollar.
In doing this, the central bank has consistently drawn down from the foreign reserves, leading to accelerated decrease in the country’s foreign reserves. Consequently, the foreign reserves decreased by $153.59 million to $38.10 billion as of last week ended October 6, 2022.
According to market analysts the CBN being the major supplier of dollars to the market, is under intense pressure to supply the much needed foreign exchange in the market.
“CBN is the major supplier of forex in the market. They are under intense pressure to supply needed forex but that is an exercise in futility because it has limited inflows and cannot sustain its defense of the Naira,” says David Adonri of Highcap Securities Limited.
Despite CBN’s intense effort to support Naira, the local currency depreciated by 0.5 percent to N439.17 per dollar at the Investors and Exporters Window (I&EW) but appreciated by 0.7 percent to N735 per dollar in the parallel market.
Total turnover of forex traded at the official I&E window during the week under review (as of 06 October 2022) decreased by 42.5 percent to $325.29 million, with trades consummated within the range of N425 – 460 per dollar.
Also, average system liquidity level declined to N113.17 billion, down from N182.97 billion in the previous week.
At the Treasury bills secondary market, the bears dominated the market as participants exited positions to provide some respite to their funding obligations.
Consequently, the average yield across all instruments expanded by 17 basis points to 7.9 percent.
However, across the segments, the average yield dipped by 2 basis points to 10.3 percent at the secondary market Open market operation (OMO), while most of the yield expansion was witnessed at the Treasury bills segment (+17bps to 7.3 percent).
Yields on Treasury bills are expected to go further up as participants position for the auction with N190.89 billion worth of maturities on offer this week.
Last week, average yield at the Treasury bonds secondary market expanded by 24 basis points to 13.5 percent.
The average yield was higher at the short (+49bps), mid (+11bps), and long (+17bps) segments, following sell-offs of the MAR-2024 (+177bps), APR-2032 (+21bps), and MAR-2035 (+52bps) bonds, respectively
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