Nigeria Fixed Income Weekly

The Week that was (June 4-8):  – CBN tightens but market liquidity remains robust

  • CBN continues to sap system liquidity but to limited effect : The CBN continued to move against excess system liquidity as it issued NGN232billion worth of OMO bills which is in excess of OMO maturities of NGN215billion. This net issue had the intended impact of driving up NTB yields 44bps on average: 91-day (Discount: 12.11%, Effective: 12.48%), 182-day (Discount: 12.57%, Effective: 13.41%) and 1-yr (Discount: 12.62%, Effective: 14.08%). In a similar vein FGN bond yields trended north, up 9bps relative to the prior week. However, overnight and open buy back rates held steady at subdued levels of 4.3% and 5.8% respectively which suggests the system remains sufficiently liquid.
  • Q3 2018 NTB calendar shows a neutral FG borrowing stance: The CBN released the Q3 2018 calendar for NTB issuance which shows planned government borrowings at NGN1.1trillion set against maturities of the same amount. In simple terms, the FG borrowing is simply rolling over what is maturing which implies that on a net basis no fresh borrowings. That said, the 3M and 6M tenors are net issuances while the 1-yr tenor is a net repayment. The calendar marks the end of the net repayment pattern over the last two quarters which underpinned robust system liquidity and implies likely upward pressures on the front-end of the yield curve.
  • Nigeria recorded big jump in trade surplus over Q1 2018: The NBS reported that in Q1 2018, Nigeria posted a trade surplus of NGN2.18trillion (USD6billion) which is up 20% q/q and 235% y/y. Exports jumped 63% y/y to USD13billion (crude oil exports: 76% of total) thanks to higher average oil prices and stronger oil production while imports rose more tamely 13% y/y to USD6.9billion. Petrol imports accounted for roughly 33% of total imports (Q1 2017: 34%). The trend in the trade account underpins much of CBN’s seemingly sanguine view over the exchange rate as well as the resilience in FX reserves over Q1 2018.
  • CBN widens spreads for BDC operators: In response to recent NGN pressures at the parallel market, the CBN pulled a lever, markets have forgotten existed – its window to influence parallel market expectations via the spread on its intervention sales. At the peak of the crisis, it became exotic to posit that as parallel market exchange rate was unfettered, its pricing of the Naira was the fair value. However, as we subsequently found out, parallel market pricing incorporated an illiquidity premium borne out of CBN’s excision of the segment from regular FX supply. With the resumption in BDC sales in 2017, the parallel market rate swiftly converged to that rate (plus a margin) at which CBN intervened in the segment. As such when, the widening of that margin at the start of the week, drove NGN appreciation at the segment.

The Week Ahead (June 11-14): Rates to remain range bound, inflation to continue downtrend

In the likely four day trading week ahead, system maturities rise to NGN424billion split between OMO (57%) and NTB (43%) which implies that there will be an NTB auction on Wednesday where the CBN will offer NGN180billion across the 91-day (NGN6.2billion), 182-day (NGN50billion) and 1-yr (NGN125billion). In addition, the NBS is set to release the May 2018 inflation data on Wednesday which is likely to print at 11.4-11.6% (April: 12.5% y/y) which will extend the 16-month declining pattern.

Figure 1: Naira Yield Curve

NGN yieldd curve

Source: NBS, FMDQ

 

Abbreviations

  • OMO: Open Market Operations
  • NTB: Nigerian Treasury Bill
  • FGN: Federal Government of Nigeria
  • CBN: Central Bank of Nigeria
  • FAAC: Federal Accounts Allocation Committee
  • I&E: Investors and Exporters Window
  • NBS: National Bureau of Statistics

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