During the review week, the general direction of activities was influenced largely by the maturity of OMO bills and a renewed interest from the domestic investors.The OTC market recorded moderate intraday volatility in reaction to current factors driving activities in the domestic financial markets. However, the market witnessed some sort of demand as traders endeavoured to cover up their various positions, which resulted in minimal drop in yields across maturities; nonetheless, yield levels remained at the same levels. We are inclined to note that demand was driven by the observed increase in interest from domestic pension funds on the back of increased yields following the recent increase in CRR for public sector funds to 50% from 12%.
In our view, present levels of demand may be insufficient to drive yields below current levels. In the days ahead, we expect yields to trend northward as the CRR debit date (August 7, 2013) approaches. We highlight that the expected rise in yields may attract the interest of offshore investors who are attracted to high interest rates.
We however maintain our contrarian view on the state of the financial markets in Nigeria i.e. being open to the vagaries of foreign portfolio investors as a result of the prevailing policy stance. We equally reiterate our opinion on the need for an expansionary policy in Nigeria with a view to facilitating business expansion, reducing unemployment, increasing production and overall output growth beyond the current single-digit levels. Whilst we acknowledge the challenges on the fiscal side, we believe a contractionary policy exacerbates the situation given Nigeria’s young and growing population (median age: c.19yrs) and moribund real sector.
As highlighted in our note last week, the market experienced the maturity of OMO bills worth c.N210.57billion which resulted in upward movement of rates when compared to previous week’s close. The shorter end of the curve was most affected given that there was no auction (treasury & OMO bills) during the week. However, the market is expected to readjust as soon as the CRR debit takes place in the week ahead.
In the Eurobond market, First Bank of Nigeria (FBN) plans to issue a $300million Eurobond. This is as the bank took on an investor road-show in the UK and US during the review week; we could recall that earlier report has it that the bank would be accessing the international bond markets this year. Initial terms available suggest that FBN will seek to issue a 7year callable subordinated instrument with a yield of c.8.50%. The bond is expected to be callable after five years whilst expected rating is “B” (S&P) and B- (Fitch). First Bank is currently rated at BB- by S&P; and B+ by Fitch.
In the week ahead, we expect that treasury bills worth c.N172.06billion will be offered to the market. We equally expect that treasury and OMO bills worth c.N172.06billion and c.N73.74billion respectively will mature.