The week that was (July 3-7) – CBN tapers OMO clearing rates as the 6M paper cracks under pressure

  • 182-day paper leads NTB yields lower while bonds continue to stand pat: The dichotomy across the NGN yield curve continued last week as short dated Nigerian Treasury Bill (NTB) yields closed lower while the yields on Federal Government of Nigeria (FGN) bonds remained  broadly flat. Accordingly, the ‘hump’ at the 1-2 year maturity of the NGN yield curve remained intact. At the short end, NTB yields declined roughly 28bps on average with strong buying along the 6m tenor, where yields dipped nearly 90bps, being the key driver of yield compression. In my view, the pressure on the 6M bill reflects a combination of forces: lower rates on STAB issuances (16% on discount basis), lower marginal clearing rate at OMO auctions at 17.95% (vs 18% since the start of the year) and the cutback in yields for the tenor at the NTB primary auctions. Cumulative impact of these forces weighed on the 6m bill.
  • CBN continues to prop NTB auctions: At the NTB auction, the divergence between primary and secondary market yields on the 3M and 6M paper continued with the CBN holding the 13.5% and 17.5% (discount) line for the two tenors at the window vs 18.24% and 18.59% (discount) on the actual market. Though bid-offer declined to 1.05x from 1.15x at the last auction, the CBN deployed saavy in ensuring that the FGN successfully rolled over the NGN177bn on offer by filling up under subscribed 3M and 6M debt sales with extra borrowing on the over-subscribed 1yr tenor. As I noted, my suspicions are that CBN is playing the ‘greater fool’ by purchasing  3M and 6M tenors at higher prices than in the secondary market given the rise in its NTB holdings to a 6-year high in April 2017.
  • CBN tapers marginal clearing rates OMO auctions: There were four OMO auctions of which three were successful with the CBN mopping up NGN97bn. In addition, the apex bank lowered the marginal clearing rates by roughly 5bps across the two tenors.
  • DMO Q3 17 calendar hints at softer government borrowings: As I noted last week, the DMO was likely to issue a calendar with tamer borrowings after strong traction on its foreign borrowings in H1 2017. Indeed, mid-point on the Q3 17 debt issuance calendar of NGN405bn points to a NGN10bn slash in the gross borrowing run-rate over Q3 17 from Q2 17.  Given maturities of NGN120bn translates, the calendar implies the FG would undertake net borrowings of NGN285bn.
  • Sukkuk delayed or flop?After much fanfare behind the Sukkuk announcement, there has been relative silence over the fate of the NGN100bn bond to have been issued last week. Word on the street suggests the issue has been shelved till a later date. On its twitter page DMO seems to have postponed the issue with a tweet stating that the offer date would be announced in the futue

The week ahead (July 10-14) – Downward sticky inflation and likely restraint at the FGN bond auction

  • In the week ahead, the monthly FGN bond auction holds on Wednesday with the DMO offering NGN135bn (NGN5bn less than in June) for sale  as well as CPI inflation readings.
  • FGN bond auction:  Following recent debt issuances, the FGN appears fairly liquid implying limited scope for any desperation as observed in early 2017. The comfort from an improved revenue profile should continue to drive a more cost conscious approach to borrowings with greater inclination to kip a tight lid on borrowing costs. Consequently, I believe for an investor, an optimal approach towards winning at the auction should be at an average marginal bid of 16.1-16.2%. (June: 16.19%, May: 16.3%)
  • Inflation to show signs of resistance: The NBS should release inflation for June this week and my thinking looking at the m/m inflation readings which have averaged 1.73% over the last three months against the 1.71% m/m base in June 2016 suggests that CPI inflation should hit a brick wall. Specifically, I’m looking for a 1.75% m/m reading in June (May: 1.88% m/m) which implied annualized reading of 16.3% flat from May. Basically, the softer base effect over June and the rest of the year would pave way to elevated m/m readings in 2017 increasingly determining the headline number. The CBN is more likely to react to this surprise with further tightening which could mean a modest rises in marginal OMO rates as well as the rates on STAB issuances.
  • Pending the release of the CPI numbers and likely policy response, I suspect the 6m bill would come under pressure as OMO paper of lower rates increase in circulation. Elsewhere CBN interventions in the FX market should continue to drive intermittent bouts of liquidity strains in the system leading to high interbank rates and volatile trends in the 91-day tenor.

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