May 11, 2023/United Capital
Yesterday, the Central Bank of Nigeria (CBN) conducted its first NT-bills auction for May-2023 at the primary market. The CBN offered a total of N143.98bn bills across the 91-day, 182-day and 364-day papers. At the auction, investors’ demand was strong, with total subscriptions printing at N820.8bn, implying a bid-to-cover ratio of 5.7x. The bulk of the demand came for the longer-tenured paper as the one-year paper was oversubscribed by 5.6x. Notably, the apex bank opted to sell just the amount on offer.
In line with market expectations, the stop rates across all tenors remained depressed, as seen in the previous two auctions. The stop rate on the 91-day, 180-day, and 364-day papers fell by 80bps, 156bps, and 118bps, to settle at 4.50%, 6.44%, and 8.99% (vs 5.30%, 8.00%, and 10.17%) respectively. The decline in stop rates can be attributed to the buoyant liquidity present in the financial system following the residual inflows from April’s bond maturity to the tune of N736.0bn.
Looking forward, we expect to stop rates in subsequent auctions will begin to tick upwards in the near short term, giving room for a yield curve reversal. Our expectation is hinged on the back of low maturities to the tune of N103.5bn (N23.5bn coupon payments and N80.0bn OMO maturities) expected till the end of H1-2023. In addition, the anticipated hike in Monetary Policy Rate (MPR) shapes our outlook for an uptick in rates in the fixed-income environment. The need to tackle persistent inflationary pressures and defend the weakening naira will play a considerable role in the hike decision at the MPC’s May meeting. Lastly, the sustained global hawkish monetary policy tone will lead to a strong hike consideration for the committee to avoid capital flights. For equities, we believe that the expected rate reversal will lead to a bear market as investors would switch asset classes and favour fixed-income instruments. Also, we expect profit-taking activities off the extended rallies seen in the market due to the Q1-2023 earnings season.
