A relative state of turmoil has presently gripped the money market in Nigeria following the spate of regulatory interventions in the hitherto most juicy treasury bills segment of the market.

Accordingly, the prognosis at the moment is that banks earnings may be faced with another bout of margin-dilutive pressure as analysts’ stress that the rate of yields on treasury bills instruments would sag strongly in the fourth quarter of financial year 2019.

During the immediate past week already, the average yield on treasury bills had witnessed a drop. Based on their readings of the situation, this drop-scenario may be taken further, and even across the first quarter of 2020.

In the extant situation, the stop rate for the 91-day tenor dropped to 7.7998% against its previous figure of 9.499%. This is also just as the 182-day tenor instrument tailed off to 9% compared to the 10.45% it had attracted in the previous primary market auction.

Things were not significantly different at the longer end of the market where the yield rate on the 364-day tenor equally nosedived to 10%.

Commenting on the movements within the space, the analysts at Messer’s Greenwich Trust Limited, GTL, a financial solutions provider, in their fixed income report said that in a month that was dominated by market reforms and vigour, it is note-worthy that the market witnessed a change in dynamic in the treasury market segment.

The firm’s research analysts said that from where they stand, they therefore expect yields to reduce in the light of expected maturities hitting the system in November.

“In November, we anticipate N1.462 trillion in maturing OMOs bills along with N275.46 billion worth of PMA bills”, the report projected.

However, when this amount enters the pipeline, analysts anticipate that, the adjustments already made in the regulatory atmosphere would very likely corral such funds into the bond and equity market, and consequently pressuring yields further across the money market curve to even go lower.

Putting the lid on the subject, GTL noted that the expected developments were clearly going to be an almost inevitable response to the apex bank’s market directive barring debtors from owing treasuries and directing banks to adequately fund their accounts ahead of Open Market Operation (OMO) results.

“In our view, this is an attempt to curb the bloated demand we witnessed earlier in October in an attempt to meddle with stop rates”, the firm had stated in the report.

It will be recalled that the Central Bank of Nigeria, CBN had recently published a circular directing banks to exclude individuals and non-deposit money banks from participating in OMO from both primary and secondary market transactions.

With the glaring implication that this would mean that only foreign portfolio investors and deposit money banks are allowed to trade any further in the market, the other side of the equation though is that this proclamation has however reduced the range of investible securities in a market that was already best by the challenge of a dearth of varieties, Greenwich said.

The firm stressed that though OMO by etymology is not an investible security per se but a mechanism deployed by an apex bank to infuse or mop up liquidity from circulation, the current action may also not be far-reaching enough.

“One would think the CBN is pushing towards returning OMO to its intended state but the inclusion of foreign portfolio investors’ states otherwise”, the firm revealed.

Greenwich Research opines that there could be a plethora of reasons propelling the CBN to implement the current range of directives, including the need to curb inflated bids at auctions; hence the apex bank is now requiring banks to pre-fund its accounts before auction results are published.

Greenwich’s view also is that it is in a bid to push debtors to service their debts and consequently reduce the volume of non-performing loans (NPLs) in the banking sector that the apex bank had equally pushed to restrict debtors from owning treasury instruments.

A third rationale, the report outlines is the fact that the CBN was acting in a manner that is intended to spur and influence greater investors’ participation in the equity market (likewise, we have seen stronger inflows to the bonds market) which has remained relatively muted in the year.

And fourth, the report reasons that the apex bank’s restricting of individual investors and non–deposit money banks from participating in OMO is to shore up its FX reserves.

It said: “The apex bank is doing this to temper down capital flight seen lately that had resulted in the depletion of the FX reserves and weakening investor confidence”.

It connects the situation to ‘increased volatility in the energy market which is a major source of revenue for the sovereign, heightened global recessionary indicators and persistent Naira devaluation rhetoric.’

And putting a net lid on all of the variables, the report surmises:

“We expect to see increased buy sentiments at the Primary Market Auctions (PMAs), Bond Auctions and secondary market participation”, Greenwich noted.

Data obtained from FMDQ indicates a solid growth in bond turnover for October when compared with data for September.

In October, a total of 2,057 trades were executed compared to 1,216 in September, representing a premium of 69%, and valued at N1.542 trillion as against N932 billion in September.

Furthermore, the bills market in terms of turnover plunged. 11,523 trades were executed in October as against 12,678 recorded in the previous month; with this representing a decline of 9%.

Analysts at Greenwich said this is in tandem with its expectation as market players will seek to thrive in the bonds space due to pressure in the bills space as a result of new market dynamics.

‘The CBN in its scheduled PMA will roll over N275.46 billion worth of maturating bills, however with the apex bank still lingering N1.462 trillion from OMO maturity, we anticipate the funds trickling into the bond and equity market, consequently pressuring yields across the curve lower.’

Initially the treasury bills average yields trended higher, towards the end of the month, we saws yields steep lower driven by market players hunting for bills to invest their idle funds in light of unavailability of investible securities to absorb the lingering liquidity due to the OMO restriction by the CBN.

Average Treasury bill yield compressed by 59 basis points then settled at 12.69% from 13.28% in the prior month.

Buy pressure was witnessed across all maturities, although investors sentiment was skewed towards the July 2020 maturities pushing yields southward to 12.26% from 14.50% in the previous month.

In an attempt to manage liquidity in the system the CBN conducted five open market operations (OMO), offering bills worth N1.26trillion to the market, however it also sold a total of N1.693trillion.

Furthermore, OMO maturities in the month of October amounted to N2.008trillion.

Going further, the CBN conducted three PMA sessions, selling bills worth over N388.40billion across the 91, 182 and 364–DTM at an average stop rate of 10.46% (prev. 11.10%), 11.01% (prev. 11.77%) and 12.54% (prev. 13.29%).

This represents a decline of 5.76%, 6.45% and 5.64% respectively with demand strongly geared towards the 364 maturity.

Bills worth N360 billion matured in October. Going forward, activities in the bond market commenced on a relatively quiet note as average yields moved marginally upward.

However buy interest picked up towards the end of the month pressuring yields downward to 12.78% from 14.15% in the prior month indicating a decrease of 137 basis points in average yields.

Analysts said they saw investors display increased appetite for the July 2021 and March 2024 maturity pressuring yields lower by over 200 basis points.

Investors’ participation intensified in October with increased turnover and Foreign Portfolio Investment when compared to September.

The DMO in October auctioned bonds across the 4, 10 and 30 year-to-maturity (YTM) at 14.05% (prev. 14.39%), 14.23% (prev. 14.43%) and 14.60%(prev. 14.64%) respectively.

A total amount of N140billion was sold of the N250 billion subscriptions, investors bid was geared towards the 10 year maturity, settling the bid to cover ratio at 1.83x.

System liquidity remained elevated even as the banking balance closed significantly higher by over 143% to settle at N474.81 billion in October, compared to N195 billion the prior month.

Albeit, the overnight (O/N) and the Open buy back rate (OBB) softened by 39.02% and 42.00% to settle at 5.36% and 4.64% from the 8.79% and 8.00% it had recorded in September respectively.

Reacting to the development, David Adonri, MD/CEO, HIGH CAP Securities Limited was quite upbeat:

‘That means that financial assets will now shift from short term financial assets to long term financial assets and that is what the capital market has been looking for. There have been more investments in short term financial instruments in the market. It could be likened to the condition known as inverted yield curve where long-term rates are lower than short-term rates — suggesting that markets expect a recession, which will reduce interest rates in the near- to -mid-term. But what has happened now is a market correction because financial assets will now shift from the short term to long term.’

For the analyst, Thomas Ezeh, it is a development that requires being observed over time:

‘Treasury Bill rate yields tend to fall as bond prices rise, the rise in bond prices occur when investors put pressure on demand in primary and secondary markets as interest rates fall. What has happened in Nigeria is that by preventing individuals and local corporations from participating in the local Open Market Operations (OMO) of primary market dealers, investors have voted for alternative investments. The reversal in the downward looking prices of banking sector on the NSE, reflects the mild resurgence of investor interest in equities as fixed income yields flatten.’

In the light of this then, how the development should be viewed in the broader context of stimulating greater economic activity in the nation. Is the nation already on track?

‘Not really. Money is simply shifting from one short-term investment class to another. The CBN’s intent is to encourage real sector expansion and discourage crowding out of the private sector from the local borrowing market. OMO investors will go to the stock market to increase equity positions but this will not increase lending remember most recent equity investments have involved “hot” rather than “patient” money. The major push towards domestic credit expansion is the new 65% LDR by December 31, 2019.’

So we continue waiting.