CBN is currently in discussions with banks on ways to reduce FX trading restrictions and increase liquidity while maintaining Naira stability. The FX Interbank market switched from price-driven to order-driven mechanism in February and the apex bank also shut its WDAS window to curtail further naira depreciation.
Despite the significant reduction in political risk, Foreign Portfolio flows into the Nigerian securities market have been modest as some investors expect a 5-10% further devaluation this year. Increasing Interbank FX liquidity will likely lead to further drop in reserves and Naira has weakened to N222/$ in the parallel market. Pressure persists on the nation’s FX reserves as huge legitimate FX demands still remain unmet at the interbank market.
Further yield compression
We anticipate a contraction in rates across the curve in the near to medium term as we believe the primary causes of the yield expansion we saw at the start of the year are no more. In recent times, we have seen the political climate become less charged, oil prices hit year highs and reserves deplete at a slower pace. In light of all these, we expect yields to trend slightly downwards or remain flat going into next week.
In the bonds market, there was a rally early in the week, despite a slow start, as market players reacted to the bond offer circular. In light of that, we saw both local and offshore players scramble for the higher yielding bonds. As a result, yields trended downwards across the curve. We saw this rally continue into the week, albeit with lesser intensity due to profit taking activities.
The level of demand at the primary auction held during the week was over N328bn with only N150bn sold. Yields printed on the 91-, 182- and 364-day bills closed at yields of 10.35%, 13.775% and 15.45% respectively. The result showed the 364-day bill close higher by over 100bps, while the 91- and 182- closed same levels as the previous auction.
With market playing the high liquidity, we foresee a further contraction in interbank rates and Treasury bill yields mostly at the short section of the curve. Furthermore, we expect the CBN to curb / tame the money flow via series of OMO auctions.