Nigeria Fixed Income Weekly

The week that was (Sept 25-29) – Dovish MPC signals induce strong duration buying

  • Mixed patterns across the yield curve: The two segments of the NGN yield curve moved in different directions as short dated yields closed the week higher than the prior week with benchmark tenors up on average 50bps: 91-day (discount: 18.16, effective 19.12%), 182-day (16.85, effective 18.39%) 1yr (16.52, effective 19.69%). In terms of paper supply, the CBN issued NGN93billion as against NGN123billion in maturities. In contrast, longer dated bonds continued to rally, with yields down on average 20bps, following the September bond auction. At the auction, where the Debt Management Office (DMO) planned to sell NGN135billion worth of bonds, bids nearly 3x the offer turned up. Given the dovish signals emitted by the CBN and the withdrawal of one-year paper, pension funds adopted an aggressive approach to bidding to lock-in higher rates as reinvestment risk looms large. This resulted in the lowest marginal clearing rate (15.94%) since July 2016 and paved way for the DMO to upsize the offer by 81%.
  • Dovish sounding CBN continues to hold: As expected the CBN held rates by a 6-1 vote, citing the negative real rate implied in the MPR at 14% as justification for leaving the status quo unchanged. However, in the lead-up to the MPC, debt markets were unnerved by the reduction in OMO clearing rates and fragile GDP growth reading which raised prospects of monetary easing. That said, the MPC sounded quite dovish and seemed more like a read-out ahead of a decision to cut. However, the apex bank held out the possibility of coordination with the fiscal side in the event of inflation declining below threshold in 2018.
  • FGN targets fresh Eurobond issuance: Smarting from the sidelines of the FMDQ Debt Capital Market conference, the DMO boss announced that the FGN was seeking to tap global debt markets for USD5.5billion issue in Q4 17 with an issue of USD2.5billion set for October. The announcement appears to reflect growing concerns over debt service metrics with recently released Q2 17 budget implementation report showing that the FG spends NGN62 in servicing debt for every NGN100 in revenues. The size of the issue and the intention to deploy USD3billion in refinancing NGN debt implies lower fiscal borrowings from domestic debt markets in 2018.
  • In addition, the DMO announced that its debut NGN100billion Sukuk issue was 5% oversubscribed. Given the sizable subscription at the bond auction, the success of the issue likely owed much to a fresh sub-set of investors and hints at a sizable appetite by Islamic issuers both for Nigerian risk and high rates. By introducing this set of investors, the FGN appears to have unlocked a previously neglected class of savers given Nigeria’s large Muslim populace.
  • In summary, dovish signaling from the MPC alongside a lukewarm CBN attitude towards liquidity induced strong push towards buying duration which weighed on longer dated yields. At the strong bullish patter last week, traders paused at the short end to book profits amid a fairly liquid money market.

The week ahead (October 03-06) – The onset of monetary and fiscal policy coordination?   

  • In the new week, the DMO is likely to release the Q4 2017 bond issuance calendar and there is an NTB auction on Wednesday where the FGN would rollover NGN130billion and there is an OMO maturity of NGN283billion on Thursday. As in prior weeks, markets are likely to focus on CBN’s posture with regards to system liquidity.
  • How to play the NTB bond auction? On offer at the auction on Wednesday are:  91-day (NGN29billion), 182-day (NGN33billion) and 1yr (NGN68billion). Given the net repayment last week, subscription is likely to remain robust, implying a strategy of bidding in line with market rates at the end of today is optimal. Given the disconnect between primary and secondary market rates for short-dated tenors and my guess on discount rates as follows: 91-day (13.15-13.2%) and 182-day (16.8-16.85).  For the 1-yr, the fear of robust demand leads me to likely range of (16.4-16.5).

In all, I see the CBN maintaining its strategy of holding fire in terms of liquidity mopping via OMO, which should exert further downward pressure on rates across the yield curve. 

This is not not a financial brokerage or asset management website and as such this post should not be considered investment advice. Nothing here constitutes an invitation to buy or sell any security mentioned here. Please consult your investment/financial adviser on any securities mentioned here.


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