Nigeria Fixed Income Weekly

The Week That Was (November 20-24)

Yields succumb to fresh bullish sentiment as CBN lowers OMO clearing rates: Rates declined across the NGN yield curve last week despite CBN gross issuance of N318billion in Open Market Operation (OMO) bills which was in excess of the N200billion in OMO bill maturities. Beyond market concerns over the impact of the FG’s successful Eurobond raise, which would cascade into lower domestic borrowings in the near, markets were spooked by CBN’s decision to lower the clearing rates on its OMO auctions (down 10-15bps) along the 3M and 6M tenors on offer. The move hurt the 1-year bill the most as it declined 31bps to 18.47% (discount: 15.74%) while the 3M was down 5bps to 16.32% (discount: 15.74%). The 6M paper sold off and was down 57bps to 19.35% (discount: 17.65%) due to brief tightening following the CBN retail FX auction.

Lower fiscal borrowing appetite at bond auction drives fresh bullish activity: The improved cash position of the FGN allowed it to display cost sensitivity at the monthly bond auction, where despite an oversubscription, the DMO only took up 88% of the N100billion on offer at lowered clearing rate of 14.8% (October 15%). Bond market bulls took the lower fiscal supply signal from the primary market and dominated sentiment in the secondary market driving bond yields on average 22bps over the week.

Nigeria taps Eurobond market for the third time: As noted, the FGN hit global debt markets last week with $3billion raise split equally between a 10-year and 30-year bond issued at par at rates of 6.5% and 7.625%. Demand was robust with a book of $11billion which drove compression in issuance yield from IPT range. Given the lack of SSA papers of junk rating for the 2047, it was priced off the Egyptian 30-year looking at the issuance spread over US Treasuries with the Nigerian paper closing at spread of 485bp relative to credit spread of 484bps for the Egypt paper.

Static MPC but dovish forward guidance:  MPC meetings have become so predictable these days and the concluding press conference is now merely a session for the governor to rehash different arguments for and against tightening or easing and then proceed to announce a hold decision. Thus, in line with market expectations, the CBN held all policy parameters at its November MPC by an 8-1 vote. Of all the reasons outlined, it would appear the CBN was worried that a rate cut would take its policy rate deeper into negative territory which could re-ignite pressures on the currency. However, consistent with a steady pattern in recent speeches in the media, forward guidance was sufficiently dovish, hinged on a benign single digit inflation outlook for H1 2018. As argued previously, this is plausible given the stable FX patterns and absence of fresh shocks to domestic fuel and electricity prices.

Soft underlying economic growth data: In terms of economic data, the real GDP growth print of 1.4% y/y was well behind my 2.5-3% y/y forecast due to a miss in manufacturing GDP which contracted, in a somewhat odd direction from that implied by the above-50 PMI readings. Part of this was from oil refining which dropped by nearly half and lower cement volumes as delayed capital spending likely played a hand. What this does is create a low base for faster growth in 2018 as Telecommunications has not turned the corner with a pick-up in subscriber growth and lagged impact of an improved FX picture becomes evident in manufacturing GDP.

Chart 1: NGN Yield Curve

NGN yield curve

Source: FMDQ, NBS

The week ahead (November 27-30)

A possibly shorter week with a holiday on Friday which would see an NTB auction on Wednesday with N117billion on offer and OMO maturities of N132billion on Thursday. In terms of data releases, the key one is the fiscal numbers for September which from the 2018 budget speech will likely show fiscal revenues at N3.29trillion and N4.87trillion which implies a 9M 17 fiscal deficit of 1.9% of reported 9M 17 nominal GDP. Importantly, the revenue improvements placed against actual debt service paid would translate to debt service revenue ratio of a more manageable 42% for the period, down from the 62% reported in H1 2017. Last year, we saw something similar with H1 debt service ratio of 52% before subsequent reversion to 45% when the FY numbers were published. Thus, a good advice is to take interim numbers from the budget office with a good dose of salt.

How to play the NTB auction? As stated earlier, the CBN would offer N117billion split as follows: 91-day (N26billion), 182-day (N11billion) and 1yr (N80billion). Going into an NTB auction the dovish view is likely to be dominant, given the CBN’s move to lower OMO clearing rates and FGN plan to reduce NTB issuance following its successful Eurobond raise. I fear discount rates are likely to close at fresh lows and we may see the 91-day close below 13% while the 182-day and 1-year shave off 5bps from last close to 15.2 and 15.55% respectively. As ever watching trends at the close of market on Tuesday would be a good indicator.

For secondary markets, a more buoyant liquidity system is likely to keep yields subdued during the four day trading week.

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