Banks Move Cash to Bonds, Depress Yield


By 06.22.2010  


Banks are moving the bulk of their funds from fiscal spend and other sources to bonds – a development that has triggered excess demand for the securities and by extension, reduced yields to bond holders.



Traders are expecting yields at the government’s auction to drop by 200 basis points from today, owing to surplus demand buoyed by banks. Before the latest Federation Account Allocation Committee (FAAC) allocations, the 20-year bond traded at a yield of 8.7 per cent, but last week it traded 8.3 per cent.THISDAY gathered that a significant portion of the N403 billion, representing allocation from the FAAC that hit the system last week was reserved by banks for bond purchases in today’s issue by the Debt Management Office (DMO).



The DMO will today sell N80 billion in 3-year, 5-year and 20-year sovereign bonds, in its sixth debt auction this year. Investors bought bonds at the secondary market last week, anticipating that the government will issue at a lower yield today ahead of high demand by banks taking position.Giving an outlook of the bond market and the expectations for the sixth auction this year, the Financial Market Dealers Association (FMDA) said: “The market might experience minor oscillations in rates within the bands of 100-300 basis points around the short and liquid tenor funds as a result of provisions for bond auction.”



The Association pointed out that activities at the secondary bond market last week saw most of the yields of trading securities on the medium-term moderating downward on account of the FAAC injection. It noted that the short and longer tenor instruments were mixed between Wednesday and Friday last week, “due to position taking by banks in readiness for today’s auction.”An analyst, who spoke with THISDAY last Monday said: “Monies have come in and dealers have cash to buy bonds from the secondary and primary market. This will make the demand at the auction high, so the stop rate (the yield at the auction close) will go down.”



Excess liquidity from the government’s revenue presents a situation of probable surplus demand by banks against supply, which ordinarily pushes down yield. FMDA said: “We expect the yield on trading securities to drop this week following the injection of FAAC funds in the money market particularly the short tenured maturities.” The DMO said that yields will be determined after today’s auction.





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