The Week that was (June 25-29): – Offshore bears and thinner system liquidity combines to drive rates higher
- Offshore selling fuels bearish sentiment in debt market: Continuing from last week, foreign investors continued to exit Nigeria’s bond markets with the sales driving a further uptrend in yields (up 20-30ps on average) especially at the long end where sell-offs have pushed yields over 14%. Sustained offshore selling pressure at the long end of the NGN curve continued to underpin bearish patterns at the front end with yields on Nigerian Treasury Bills up 13ps on average: 91-day (Discount: 12.4%, Effective: 12.8%), 182-day (Discount: 12.27%, Effective: 13.07%) and 1-yr (Discount: 12.57%, Effective: 13.9%).
- Two factors appear to be driving the exits: firstly, the development is in line with a pattern of selling across emerging/frontier markets in response to rising yields on US Treasuries. Nigerian equities have witnessed their fair share of this bearish sentiment and it appears the pressure moved to bonds. In addition, it appears the closer we draw to the elections, the higher the political risk premium on NGN assets which reduces foreign appetite.
- CBN continues to remain passive towards NGN liquidity: Despite the sell-offs, the CBN continued to remain reluctant to drive yields higher with OMO sales of NGN206billion on Monday short of the NGN377billion that matured the prior week. As is new normal, there was no OMO auction on Thursday for the NGN183billion maturities. This posture continues to make mockery of the purported tight monetary policy stance by retaining MPR at 14%. In my view as long as currency markets show no signs of pressure, the CBN is likely to continue acting aloof.
- DMO trims borrowings at monthly bond sale: At the monthly bond auction, despite a higher subscription for the NGN60billion on offer with bid-cover of 100% (May: 92%), the DMO’s higher focus on cost resulted in reduced issuances to NGN31billion with average clearing rates of 13.7% (May: 13.5%). This cost consciousness continues to reflect an improved fiscal revenue profile which has limited the desire for borrowings that could have driven issuances higher. As I noted last week, the budget passage meant that the DMO would now bring forward plans for a Eurobond sale. Indeed, the DMO sent out notices to international banks of its intention to tap debt markets again which looks to occur over Q3 2018.
Figure 1: External debt and costs
Source: DMO *2018 is Q1 2018
The Week Ahead (July 2-6): Bears to remain intact
In the week ahead, system maturities rise to NGN NGN409billion split between OMO (58%) and NTB (42%). At the weekly NTB auction, the CBN will seek to rollover NGN170billion across 91-day (NGN9.52billion), 182-day (NGN34billion) and 1-year (NGN127billion).
The start of a new quarter could bring a recalibration in investor thinking with increased tendency for offshore sell-downs on increased political risk premiums. Inflation is likely to bottom out at 10-11% as base effects close out in July while the prospect of JP Morgan EMBI inclusion comes into view with index changes announced in late August into September. In all, despite higher oil prices, the NGN yield curve looks let to drift higher after declining over most of Q2 2018.
Figure 2: Naira Yield Curve
Source: NBS, FMDQ
- OMO: Open Market Operations
- NTB: Nigerian Treasury Bill
- FGN: Federal Government of Nigeria
- CBN: Central Bank of Nigeria
- DMO: Debt Management Office
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- NBS: National Bureau of Statistics