The fortnight that was (Jan 2- 12) – Catching a falling knife
Welcome to 2018 and signing back in from the holidays so I will do a wrap-up of the first two weeks.
Debt markets open up to fresh bullish activity: Following the strong close to 2017 and recent up-move in oil prices to $70/b it would appear that Nigeria is again flavour of the month and significant offshore interest has cascaded into resumption in bullish activity across debt and equity capital markets. Indeed strong foreign participation was evident at the long end of the naira yield curve where bonds yields have declined 79bps and are now approaching 12% levels with most papers trading between 13.3 and 13.79%.
However, while strong demand continued to depress the 1-yr Nigerian Treasury Bill (NTB) which is down 110bps YTD to 13.83 (effective 15.99%), short dated NTBs actually rose in secondary trading with with the 3M bill up 300bp from year end to 13.89 (effective 14.4%). This reflects increased CBN issuance with N930billion in OMO bills relative to maturities of N503billion over the first week. Despite continued compression in offered rates down 30bp and 70bp for the 3M and 6M tenors sold, it appears markets digested the CBN signal appropriately.
As I mentioned in my review of bond markets last year, while the CBN had switched from an ultra-tight monetary policy stance in Q4 2017, the apex bank would still try to create a floor for interest rates whenever a liquidity surfeit threatened to drag rates to levels it deemed unacceptable. Given the clearing rates it would appear the CBN is comfortable with effective yields of 13-15% for less than 6M maturities. Thus, while a liquidity deluge applied downward pressure on the entire yield curve, short term rates were immune thanks to stepped-up CBN activity at the segment.
Strong demand sees yields decline at inaugural NTB auction: In line with the Q1 2018 issuance calendar, the DMO issued only N13billion in fresh issuance (but specific to the 6M tenor) and rolled over of N149billion. Despite the slight increase, discount rates declined 90bp (114bp effectively): 91-day (discount: 12.55%, effective: 12.96%), 182-day (discount: 13.93%, effective: 14.96%) and 1yr (discount: 14.3%, effective: 16.7%). Auction was oversubscribed 2.4x.
The Week Ahead (Jan 15-19) – Grappling with system liquidity
In coming week, key events to watch out for are the release of the Q1 2018 bond calendar and December 2017 inflation number on Tuesday. In terms of maturities, we have N326billion on Thursday split into between NTB and OMO in the ratio 71-29. The NTB maturities mean, we will have an auction on Wednesday were the DMO will look to rollover the entire lot.
Inflation readings to hit a fork in the road: Headline Inflation over December was set to decline slightly quicker than the sluggish pattern observed over much of H2 2017 due to the existence of sizable base effect from 2016 assuming the monthly trends observed in the period remained intact. However, following fresh bouts of fuel scarcity, which drove higher than regulated prices across various towns in December, the key item to track is the average national fuel price which will be released on Monday. If that number rises above N180/litre, we are likely to see a jump in core CPI (in Nigeria core inflation includes fuel prices) which will mark an end to the 10-month deceleration trend. If the number remains below N180/litre, inflation is likely to come in flat to lower in December as those pressures will be subsumed by the base. The fuel woes began mid-month so I’m leaning towards the latter which will see inflation move into 15.8-9% territory.
Lower fiscal borrowings on the horizon but: In 2018 budget, the allotment for domestic borrowings stands at N850billion. Though gross bond issuance (excluding sukuk and green bonds) came at a record N1.5trillion but adjusted for 2017 bond maturities, net bond issuance came in N858billion. NTB borrowings accounted for the rest of budgeted borrowings of N1trn. Clearly, the domestic budget allocation number should imply lower bond issuances over 2018, but as is the practice, the government is likely to frontload any issuances in the first half to build up cash to take care of the N300billion FGN 2018 bond maturity in May. Markets could take this signal as a sign to book profits over the week.
Figure 1: Naira Yield Curve
January 2018 MPC: Over the rest of the week, attention is likely to focus on the resumption of the Senate on Tuesday and likely hints about a confirmation of the CBN monetary committee members nominated by President Muhammadu Buhari. If the Senate continues to play brinkmanship, we run the real risk of not holding an MPC meeting in January which would be bad merely for optics. In the scheme of things, the CBN has long rendered the MPC pointless as significant decisions now take place between MPC meetings. Furthermore, the key object of the MPC meeting: the announcement of the MPR decision has been rendered void by OMO rates which markets actually focus. MPR is now largely meaningless totem.