The Week that was (July 16-20): – Different strokes for different folks
- Excess liquidity mutes impact of OMO sales: Despite a pick-up in OMO sales with the CBN taking out NGN496billion relative to OMO maturities of NGN430billion, debt markets continued to remain sufficiently liquid thanks to a combination of coupon inflows from FGN bonds and NTB maturities. As the thermometer of liquidity, overnight and OBB rates closed the week at 6.8% and 7.4%, down from 8.9% and 9.4% respectively at the end of the prior week. The impact of the excess liquidity meant that yields on benchmark Nigerian Treasury Bills (NTB) declined 38bps on average: 91-day (discount: 10.99%, effective: 11.3%), 182-day (discount: 11.57%, effective: 12.28%) , 364-day(discount: 12.22%, effective: 13.38%)
- Q3 2018 bond issuance calendar shows pick-up in FG borrowings: The Debt Management Office (DMO) released the Q3 bond calendar which showed a 23% q/q rise in the mid-point of planned bond issuances to NGN270 billion split between the 5-year (NGN75 billion), 7-year (NGN75 billion) and 10-year (NGN120 billion). For the record, the FGN net repaid NGN135 billion net repayment over Q2 2018. As noted last week, the pick-up reflects the start of implementation of the 2018 budget following passage last month. As a consequence, the prospect of higher bond supply pushed average bond yields slightly higher by 5bps.
Figure 1: Bond Issuance
Source: DMO *midpoint
- CBN commences Chinese Yuan (CNY) sales and NIFEX convergence continues: On Friday, the CBN announced that it was taking bids for the sale of foreign exchange (through a combination of spot and short tenored forwards) for the payment of CNY denominated LCs for Raw materials & Machineries and Agriculture. The sale would be spot settled through a multiple-price book building process and will cut-off at a marginal rate. In May, the PBoC and CBN signed a bilateral currency swap agreement to allow the two countries to swap a total of 15 billion renminbi for N720bn, or vice versa, over the next three years. The auction results would be made known on Monday. Elsewhere, the CBN continued to weaken the NIFEX exchange rate which opened the year at NGN331/$ and closed the week at NGN348/$.
In summary, while rates at the front end of the curve was weighed down by excess liquidity, bond yields danced higher on the prospect of higher borrowings and continuing offshore sales.
Figure 2: Naira Yield Curve
The Week Ahead (July 23-27): Monetary policy inertia to continue
In the week ahead, system maturities drop to NGN293billion entirely of OMO bills in an eventful week. Firstly, the week sees the release of the long-delayed June 2018 inflation data. As stated earlier, I’m looking for the headline reading to print anywhere between 10.8-11% y/y (May: 11.6% y/y) which will extend the 17-month declining pattern. In addition, the CBN commences its two-day monetary policy retreat on Monday where the broad view is for a retention of the status quo of MPR at 14%.
Why should the CBN hold? The forward guidance, though unreliable, and body language of the CBN across debt markets continue to point to a CBN fearful of triggering a large-scale exit of FPI flows from Nigeria. In particular, the CBN constantly wants to deliver positive real yields for foreign investors as a way of cultivating their continued interest in NGN assets to support the exchange rate. But what of the sliding inflation readings, no effect? As we’ve seen consistently, the CBN is likely to throw in the circular argument that the moderation in CPI is as a result of the tight monetary policy stance and that there is need to hold the line to deliver on the gains bla bla bla…. Debt markets are unlikely to bother that much as focus remains on the largely static marginal clearing rate for OMO sales which set interest rates. Indeed, following slide in inflation, that rate has been adjusted downward by the CBN and markets will be watching for clues as to whether the CBN attitude of crying wolf (by claiming a tightening stance at the MPC but actually easing on NGN liquidity) is set to enter another phase.
- OMO: Open Market Operations
- NTB: Nigerian Treasury Bill
- FGN: Federal Government of Nigeria
- CBN: Central Bank of Nigeria
- DMO: Debt Management Office
- PBoC- Peoples Bank of China
- FAAC: Federal Accounts Allocation Committee
- I&E: Investors and Exporters Window
- NBS: National Bureau of Statistics