The week under review opened with the meeting of the Monetary Policy Committee (MPC) being the key consideration and driver of activities in the domestic financial markets. Other highlights of the week include the inflow of over N1.1 trillion (c.US$7.1bn) into the system as a result of disbursement of budgetary allocations for April 2012 and the maturing of treasury bills and FGN bonds. Following the MPC’s decision to hold MPR at 12.00%, and the inflow from the matured securities, we note the consistent increase in bond prices across all maturities as a result of demand pressure.
The treasury bills market witnessed a primary auction during which N30.65 billion worth of 91day bills was sold at the rate of 13.50% against 13.19% at the previous auction, whilst N45.00 and N50.68 billion worth of 182day and 364day bills was sold at the rate of 14.14% and 14.30% against 13.87% and 13.94% during the last auction. Total subscription during the auction stood at N307.30 billion versus N513.44billion at the last auction. In our opinion, the reduced level of subscription may not be unconnected with the observed decline in interest of offshore investors as they try to sell down their domestic debt holdings and withdraw the funds thereby putting more pressure on the local currency against the US dollar.
In our view, the increased liquidity within the system led to the slight decline in the bond yields and informed further liquidity tightening by the CBN as c. N500.00 billion OMO bills were offered at the three OMO auctions whilst c. N7.70 billion was sold, at discount rates ranging between 13.24% and 13.40% with maturities between 41 and 57 days. However, we observe the low level of allotment on the offered OMO bills as a result of high rates submitted by investors.
We believe the outcome of the OMO sales suggests that operators appear to be resolute in taking maximum advantage of the monetary policy environment; hence, the predominantly high rates (c.17%+) submitted and the consequential low allotment levels (fig.3). We therefore anticipate a likely reversal in policy direction in the days ahead – probably an emergency meeting of the monetary authorities or at the next scheduled meeting in July. Our optimism is underpinned by the MPC’s emphasis on the need for domestic growth as a key consideration amongst other indicators.
This week, we expect the CBN to sustain the liquidity tightening given the level of the high system liquidity resulting from activities of the previous week.
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