The week that was (October 09-13) – A tale of two curves
- Thin liquidity levels and CBN aggression drives short dated rates higher: Coming into the week, a relatively thin maturity profile over the week (N62billion) hinted at likely scope for rates to trend higher. Furthermore, with no planned government borrowings, there was sufficient scope for the Central Bank of Nigeria (CBN) to resume its aggressive stance towards system liquidity which it displayed over the week with issuance of N166billion worth of Open Market Operation (OMO) bills over the week. Consequently, markets responded with a pick-up in short dated rates with benchmark 91-day and 182-day Nigerian Treasury Bill (NTB) yields up on average 110bps. That said, as the CBN continued to offer only bills of 6month duration, the 1yr paper remained immune from the impact of liquidity tightening, as it declined 180bps to 17.82% (discount 15.2%) possibly reflecting strong demand at the tenor.
- Overnight rates remained volatile with the Open Buy-Back/Overnight rates climbing to 45% midweek following the retail SMIS FX sales of US$306million which required bank pre-funding. Rates closed lower at 33% at the close of the week.
- Bonds continue to head south on increased foreign activity: As with the 1yr, bond yields continued to plummet, down on average 33bps over the week. This continues to reflect strong foreign buying activity given their price setting behaviour even as local investors (read pension funds) hurry to ward off concerns over reinvestment risk. Bond yields now range between 14.54-15.13% from above 16% levels in mid-September 2017.
- Fidelity Eurobond: An expensive rollover? As the FGN currently awaits National Assembly approval to tap global debt markets, Nigerian tier II lender, Fidelity Bank, tested the waters with a US$400million sale last week which was issued at 10.75%. The yield is 390bps higher than when Fidelity first stepped into the Eurobond market in 2013 is at par with that obtained by Access Bank in Q4 2016. The bank is likely to use proceeds of the issue to rollover its US$300million May 2018 Eurobond. Though a bank does not lend at the marginal cost of raising money, the high rate on the issue is likely to raise eyebrows as to how the lender will handle the issue. I will more closely examine Fidelity’s credit metrics in the coming weeks to make a proper call.
- In summary, a drop in the maturity profile during the week and renewed CBN aggression at curbing NGN liquidity underpinned a rise in short dated rates. However, increased foreign interest is catalyzing bullish price action along the deep end of the curve which is placing downward pressure on rates.
The week ahead (October 16-20) – Inflation to trend south
- In the week ahead, system maturities rise to N166billion split between NTB and OMO in a 54:46 ratio. Thus, there would be an NTB auction on Wednesday. In addition, the National Bureau of Statistics (NBS) is set to release inflation results on Tuesday.
- September 2017 Inflation: Base effects from electricity and fuel price hikes in 2016 have played a key role in the deceleration since February 2017 which explains why core inflation has slid to 12.3% y/y. However food inflation has remained elevated at 19-20% y/y largely reflecting higher outflows of Nigerian food items to neighbouring countries. Relative to the CFA Franc used in francophone countries that border Nigeria, the NGN has weakened 45% since 2014. This has fuelled increased demand for cheaper Nigerian food items as Nigerian firms see a bigger market across the border. However, following stability in the parallel market exchange rate and lower diesel costs, food prices have stabilized and I see the start of the main harvest driving subdued patterns in coming months. The CPI call for September is tricky as there have been some floods recently which could swing things a bit. However, I am biased towards prices heading south and my guesstimate is that the September headline CPI stands at 15.9% y/y with m/m reading at 0.73%.
- How to play the NTB auction? On behalf of the FGN, the CBN would seek to auction N90billion at the NTB auction on Wednesday split as follows: 91-day (N32billion), 182-day (N26billion) and 1yr (N32billion). Following the slide in recent weeks and the robust demand on the 1yr segment, caution is well advised in particular a strategy of waiting till Tuesday to observe secondary market trends is wisdom.
- Ahead of the NTB sale, I expect the CBN as in recent weeks to display a reluctant attitude to liquidity ahead of the auction to ensure softer borrowing costs for the FGN. The improved liquidity is likely to drive downward retracement in the 91 and 182 day tenors which moved higher last week.
Figure 1: NGN yield curve
Source: FMDQ, NBS