Money Bags

We are definitely done with borrowing for this year now!!! Oh, maybe we are borrowing from now for next year’s budget!!! The 50s are almost out of supply, so I need to buy duration now!!! There might be no more issuance of the 50s as they have done 930bn!!! The 26s look cheap vs the rest of the curve so I can use them to pick some short-end yield!!! When I stock my house with the finest whiskey ahead of a potential FX devaluation, it’s because I have the cash. I probably would have still bought what was needed if prices went up or down. No matter the stochastic belly of the curve analysis done in this market, the truth is we will remain bid, there is more money than instruments.

Wednesday auction saw the DMO continue its trend of overselling which matches our theory that the deficit was more than needed and we are still aggressive borrowers as a nation. We expect this trend to continue till the end of the year with about another 1trn still needed before the end of the year. We think the market has the money and the DMO won’t have a problem with bids.

The question remains value and where we see long-term rates ahead of much more aggressive borrowing plan next year. The sale on the 26s to 11.65 from a MTM of around 11% was very interesting and truly there is value there for someone that’s been aggressively buying at 11% and below pre-auction given it was trading at  10.40 before addition to the auction calendar. On the bond curve, this has the most value in our view.

Short-duration pair trades continue to look attractive going into the end of the year given our bearish view. We had advised some short 50s vs long 36s at around 10-15bps which has opened to around 35bps and we think that is where value exists. A relative yield pair trade is a short 45s or 49s vs long 50s, another interesting trade we think will make long term money, but we think repo on those 45s and 49s are tough to find given the market is net short and the technical might make it hard to realize the profit. But even in a rally, the 45s get to around 12 where there are loads of sellers and 50s will be a profit king if that happens.

Let me end my ranting. We believe yields will have an upward trend at some point this year, issuance of a new bond to replace the 50s, a market realization that bonds will continue to be oversold, money market remaining at 14% or even going higher as the CBN continues to supply $$$ to corporates. Money bags is/are not limitless. It will be a very interesting end to the year, please wear your seatbelts tight, it’s a bumpy ride.

Good luck trading.

Olushola Adeniyi

Inter-Dealer Broker

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