Nigeria Fixed Income Weekly

The week that was (April 16-20)

CBN lowers OMO clearing rates again: As I noted last week, markets rising liquidity levels, which continue to keep overnight borrowing rates at 3%, would continue to underpin downward pressure on the NGN yield curve. Furthermore, the recent rise in oil prices which now seem to be clearing a runway to USD75/bbl is adding to increased bullishness on NGN debt. At the NTB auction, where the FG had NGN58billion on offer, bids of 7.5x turned up which pushed closing rates down 84bps from the last auction. The CBN followed this up by slashing discount rates (-170bps) at the OMO auction on Thursday to 10.9% (effective: 11.25%) and 11.95% (effective, 12.99%) where it sterilized NGN500billion in the face of NGN276billion in maturities.

The cumulative impact of the reduced rates at the NTB and OMO auctions was evident in secondary market NTB yields with benchmark maturities down over 200bps: 91-day (discount: 10.2% effective: 10.46%), 91-day (discount: 10.84%, effective: 11.46%) and 1-yr (discount: 12.96%, effective: 14.79%).

FGN signals softer borrowings in Q2 2018: Further bullish sentiment for bond yields emerged with the widely expected release of the Q2 2018 borrowing calendar which sees the DMO offering to sell NGN230billion (taking the mid-point). In view of NGN300billion bond maturities in May bond markets are likely to grapple with NGN70billion excess liquidity over the quarter. This provided a fresh layer of aggressive short covering by pension funds which drove bond yields 80bps down with some bonds now trading below 13%. Regular followers of this blog would not be surprised by this showing as the confluence of slowing inflation, dovish CBN signaling and reduced fiscal borrowings was bound to drive this Bull Run.

Figure 1: NGN Yield Curve

NGN yieldd curve

Source: FMDQ

The Week ahead (April 23-27)

In the week ahead, there is no NTB auction but there is an OMO maturity of NGN226billion Thursday which likely implies an OMO auction. In addition, the monthly bond auction takes place this week which will see the DMO offer NGN90billion worth of bonds evenly split across three maturities (5-yr, 7-yr and 10-yr). In addition, an extra NGN50billion will be offered on a non-competitive basis for the 7-yr and 10-yr tenors. With secondary market yields along these tenors likely to have moved below 13%, a cautious approach to bidding is optimal.

As with prior weeks, the robust system liquidity levels will continue to drive yield compression. Though yield curve dis-inversion has continued, the hump remains along the NTB segment which continues to split investor focus and short duration strategies appear optimal for now. But with the CBN pushing OMO rates lower, the window for that strategy is closing especially in the event oil prices start testing higher levels. Should oil prices make an up-move towards USD80/bbl, the current thinking of a market sell-off as foreign investors exit over H2 2018 may not materialize as the basis for selling Nigeria increasingly appears as a weak-hand strategy. How that will play out is something investors should increasingly worry about.

 

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