Sentiments across the domestic fixed income market was largely bullish under the review period. Notably, both Open Market Operation (OMO) and FGN Treasury Bill (NTB) yields which averaged 5.1% and 2.2% at the end of Q2-2020, converged at 1.9% at the end of Q3-2020. Similarly, the year-long rally at the bond market continued in Q3-2020 as the average yield on FGN Bond dipped from 8.6% as at the end of June 2020 to end Sept-2020 at 6.8%.
This was thanks to net-inflow of funds via OMO maturities since the CBN barred locals from participating at its bills market late Oct-2019. At this point, no sovereign bills or bond of any duration yields more than inflation at 13.22%.
Looking ahead, we expect rates to remain depressed through Q4-2020. This is predicated on the large size OMO bill maturities scheduled to hit the financial system in Q4-2020. Although non-bank local investors will fully rotate out of OMO bills from Oct-2020, we do not expect a sizeable upward repricing of yields in the near term, given that FG’s planned domestic paper supply for the year are already well bought and satisfied.
Further out, we are of the view that rates could adjust slightly upward as liquidity becomes less abundant. This is barring another unorthodox move by the CBN to keep rates down. Also, the renewed apathy for duration witnessed in the latter part of Q3-2020, particularly as secondary market yields are yet to converge at primary yields, suggests investors may already be positioning for the peak of the market.
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