The week that was (April 30-May 4)
CBN tightens slightly: In a continuation of the slightly hawkish pattern from last week, the CBN continued to trying signal a floor for interest rates with another 5bps hike in OMO discount rates to 11% (effective: 11.4%) and 12.1% (effective: 13.2%) for the 3M and 9M bills respectively. In addition, the CBN issued NGN600billion worth of OMO bills relative to NGN189billion in maturities which effectively wiped out the liquidity deluge that debt markets had grappled with in recent weeks. The impact of the tightening pushed OBB/Overnight rates 100bps on Friday and a further 480bps on Monday to 7-8%. As a consequence, front end rates continued to rise with the 3M and 6M NTB yields up 50bps on average to 10.71% and 11.59% respectively. However, reflecting shrinking supply of the favoured 1-yr NTB, its yields declined 40bps to 12.84%. Farther out the yield curve, bond yields trended higher as traders found an excuse to book profits following the CBN tightening at the short end. Yields climbed 10bps on average but remained anchored around the 12.9-13.1% range.
Figure 1: NGN Yield Curve
NGN-CNY swap provides another layer of support to stable exchange rate outlook thesis: Following President Muhammadu Buhari’s US trip, the CBN announced the conclusion of the swap arrangement wih the Peoples Bank of China (PBoC) which would see the Chinese central bank provide CNY16billion in exchange for NGN720billion from the CBN. Though the implied cross rate suggests the swap was priced at the official NGN305/USD1 exchange rate, the likely transaction rates are likely going to be around the NIFEX rate of NGN330/USD1 levels of CBN interventions today. The key gain from the swap is the likely reduction of USD demand for Chinese imports (21% of total imports, 30% of USD demand) which will trim pressure on FX reserves. With Brent crude prices now setting sights on USD80/bbl, the prospect of a weaker NGN ahead as foreign investors sell ahead of the 2019 elections increasingly looks dim.
The week ahead (May 7-11)
In the week ahead, system maturities drop to NGN291billion entirely of OMO paper which means, likely CBN sterilization activity on Thursday and, no NTB sale. In terms of likely trading patterns over the week debt markets are likely to pause to digest the impact of CBN’s tightening signals, which in my view reflects attempts by the apex bank to set a floor for interest rates. Focus now turns to the April 2018 Inflation numbers with market consensus settling around 12.4-12.6% y/y. This will provide fresh stimulus for bullish activity though whether this will be enough to trigger a 100bps decline in rates from current levels is a different matter entirely. In my view, while we are likely to obtain a 100bps cut at the MPC for May for actual market rates to plummet a further 100bps, we require either index announcements or increased CBN reluctance at curbing in money markets, which I only see when inflation inches towards 10% levels by June. With the NGN300billion FGN 2018 bond maturing at the end of May, June looks set to be the peak of the bond market bull run and the bottom for yields.