The Week that was (May 21-25) – The voice of tightening, the body of loosening
- CBN changes tack on monetary easing: No surprises last week as the CBN held rates at 14% and other policy parameters constant by 8-1 vote with the dissenting member (obviously one of the new independents) asking for a 50bps rate hike. In justifying its hold decision, the CBN cited a need for greater visibility over the trajectory of economic variables, concerns over rising yields on US Treasuries, risks of oil price reversals and the impact of excess liquidity on the exchange rate. Of all these points, it would appear the CBN was concerned about signaling a loosening now due to recent currency market pressures.
- CBN continues its ‘pause’ on liquidity tightening: Continuing from the patterns from last week, when the CBN mopped up only 16% of OMO maturities, the apex bank repeated its mellow under-issuance pattern by only taking out 56% of the NGN267billion OMO maturities. Alongside increased short covering ahead of the FGN 2018 bond maturity out next week, the CBN pause on liquidity tightening weighed on yields at the front end of the Naira curve lower (down 21bps) to between 12.9-13.9%. FGN bonds yields remained largely unmoved but dipped slightly down 5bps but remain range bound between 13.1%-13.5%.
- Marginal rates climb at the May FGN bond sale: At the monthly bond auction, where the Debt Management Office (DMO) had NGN70billion worth of bonds to sell via auction and NGN30billion via non-competitive bidding, bid cover ratio declined to 0.9x (April 2.2x) which drove a rise in average clearing rates to 13.5% (April 12.83%). However, the DMO displayed a stingy streak as it elected to only allot 80%.
In summary, despite rhetoric about the need to signal tightening, actual CBN action over the week was to ease on liquidity which had the effect of driving the yield curve lower.
The Week Ahead (May 28-June 1): Rise in system liquidity likely to weigh on yields
In the four day trading week ahead, system maturities rise to NGN607billion comprised entirely of split between FGN bonds (49%), OMO (34%) and NTB (16%). The NTB and OMO maturities imply there will be first an NTB auction on Wednesday where the CBN will sell NGN49billion before the usual OMO sales on Thursday. The FGN bond maturities refer to the 2018 FGN bond which given borrowings of NGN474billion implies only net issuance of NGN174billion. The bond maturities amid a shortfall in instruments imply that significant short covering is likely to push short-dated yields lower over the course of the week. The bond liquidity is likely to drive a wave of non-sovereign issuances and I expect a host of corporate bonds to flood the bond market over June.
Figure 1: Naira Yield Curve