Will the recent rate reversal be short-lived?

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Yesterday, the CBN held a Primary Market Auction (PMA) wherein the stop rate for the 364-day bill reversed to 1.13% (prev. 3.2%). While the 182-Day bill also closed marginally lower at 0.5% (prev. 0.6%). We observed that the 91-Day bill rose to 0.048% from previous 0.010%.

This is despite the relatively small size of the offer, just at N7.0bn, divided into N2.0bn, N2.0bn and N3.0bn from the short to the long end of the curve respectively. Expectedly, the level of oversubscription was overwhelming, at 9.1x, 5.1x and 31x for the 91-day, 184-day and 364-day paper, respectively.

Will the recent rate reversal be short-lived Brandspurng
Sources: CBN, United Capital Research

Clearly, the indication of a possible earlier-than-expected rate reversal was observable in the bid range, as the upper range surged to 10% from the previous 3.2%.

Interestingly, the DMO also held a bond auction today. As observed in the bid range for NTB, marginal rates closed higher at 6.9% (previously 5%) and 7.0% (5.9%) for the FGN 2035 and FGN 2045 paper respectively, driven by increased bid quotes from dealers.

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Although the total primary market offers (both at the NTB and Bond Auctions) were meagre in relation to overall system liquidity, it is clear that the CBN may have set the ball for the reversal of rates rolling, with dealers expectedly taking a cue from last week’s auction.

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Yet, the reduction in the stop rate on the 364-Day bill also suggests that the CBN is not clear on its forward guidance or market signalling, considering the meagre size of the offer and wide bid range.

Overall, we think that the rate reversal at the bond auction will further spur bearish sentiment in the bond market as dealers move to exit their position in long-dated bonds especially those bought at a premium. Also, the equity markets may see another day of sell-off as observed last Thursday.

Give or take, we maintain our position that the recent spike in rates will be short-lived and the low yield environment will most likely persist amid significant levels of liquidity in the market.

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