The week that was (November 27-30) – Divergent movements across the NGN yield curve:
CBN wears the reluctant cap again: The CBN emitted more dovish tunes last week as it continued to lower the clearing rate of Open Market Operation (OMO) auctions (down 10bps) across the 3m and 6M tenors on offer and more importantly it allowed more bills mature. In a departure from the prior week, OMO bill issuance over the week (N72billion) trailed OMO bill maturities of N132billion which allowed the excess liquidity drive yields on short dated bills 34bps lower on average to 91-day (15.91%), 182-day (19.08%) and 1yr (18.12%). Importantly, the CBN did not send OMO auction circulars on Thursday. At the PMA on Wednesday, where the CBN has N117billion on offer, the downtrend in discount rates continued with the 91-day now sliding below 13% while the 182-day and 1-year tenors closing at 15% and 15.57% respectively.
Profit taking drives bearing run across bonds: However, there was a sell-off across the long end of the yield curve as traders booked profits which resulted in a 13bps rise across bonds. There were no major data releases, if anything the key news item was the debt service to revenue ratio had fallen to 45% as at September 2017.
Figure 1: NGN Yield Curve
Source: FMDQ, NBS
The week ahead (December 4-8)
A slightly dry week ahead with no bond or NTB auctions and major economic data releases sort of reminiscent of the seasonal slowdown ahead of the holidays. There is a N110billion OMO maturity on Thursday. If the CBN repeats the pattern of no OMO auction as has been the norm for most of this year, the short end of the yield curve could continue to decline as outside of FX auction sales, there are no levers on reining in NGN system liquidity. Indeed the CBN appears to be ramping up on reserve averaging with its tactic of weekly CRR debits which have raised the effective CRR on banks well above the 22.5% official policy guidance.
Debt service revenue ratio falls on improving fiscal revenues: As I noted last week, debt service to revenue ratio (a key metric widely cited by many analysts as the reason for impending fiscal doom) appears to have declined looking at the most recent numbers from the Debt Management Office. While debt service remained elevated, a recovery in fiscal revenues over the quarter has driven a moderation in the metric to 45% from 62% reported at halftime.
Figure 2: Debt Service to Revenue Ratio
Source: DMO, Budget Office