Nigeria Fixed Income Weekly
The Week that was (July 30- August 3): – Yield curve normalizes due to bulging liquidity at the short end
- Pick-up in system liquidity depresses yields: Continuing the pattern from last week, financial system liquidity tracked higher following the release of July FAAC inflows during the week. As a result, despite CBN mop-up of NGN362billion via OMO auctions (relative to OMO bill maturities of NGN270billion), system liquidity remained robust as evident in the 400-500bps drop in Open-Buy-Back and Overnight rates (which act like thermometers of system liquidity) to 4.33% and 5.33% respectively. The liquidity deluge caused front end yields to decline with benchmark Nigerian Treasury Bills (NTB) down 19bps on average: 91-day(discount: 10.94%, effective: 11.24%), 182-day (discount: 11.71%, effective: 12.43%) , 364-day(discount: 11.57%, effective: 12.54%).
- At the fortnightly primary NTB auction, the CBN sold NGN216billion as planned at marginal rates of 91-day(discount: 10%, effective: 10.26%), 182-day (discount: 10.4%, effective: 10.97%) , 364-day(discount: 11.3%, effective: 12.74%). Bid cover at the auction came in at 1.5x relative to 0.98x at the previous sale.
- Quiet week for bonds: Farther out bond yields declined 6bps on average with big declines in FGN 2020 (-10bps) and FGN 2036 (-42bps) which reflects selective buying interest from pension funds. After a rocky period over the last two months, foreign bearish activity in the deep end appears to have quietened. Whether this reflects a recovery in non-resident EM portfolio inflows or is a speculation on likely re-inclusion of Nigeria into some global bond indices will be revealed as we draw closer to September announcement dates. In the mean-time, FGN bond yields remain between 12.64%-14.22%.
- Commercial paper market activity strengthens: Following hints by the CBN at the MPC last week, commercial paper activity gathered steam with Lafarge Africa, Sterling Bank and Stanbic IBTC approaching debt markets with sales of NGN10billion, NGN35billion and USD150million respectively. The Stanbic dollar CP is interesting and looks like an attempt to mop-up USD liquidity likely earning zero interest in dorm accounts and I believe is positive for market development. That said, as long as the rates there remain unattractive to Eurobond yields, its issuance is unlikely to draw CBN suspicions about the paper being effectively a carry trade. As always contact your broker for more. Other banks remain in the hunt
The Week Ahead (August 6-10): The liquidity problem is unlikely to go-away for front-end yields
In the new week, system maturities climb to NGN452billion entirely of OMO paper. In the absence of natural outlets with no scheduled NTB or bond auctions, these inflows alongside robust system liquidity will apply downward pressure along the front-end of the NGN yield curve driving money market rates and NTB yields lower over the week. In addition, corporates are likely to push through further debt issuances and a sizable number of banks (in particular Tier II names) are currently on the road looking to lock-in the low yields.
The depressed yields on short-dated instruments raise prospects for local investors to reach out for duration to get higher interest rates which raises scope for declines in longer dated bond yields as well. How fast will the yield curve flatten? I think this depends on how long market participants have to deal with the steep declines at the front end on account of excess liquidity. Here, CBN’s QE-like comments about buying CPs, still subdued inflationary readings and continued FX stability imply limited drivers for the apex bank to turn hawkish, at least in the short term. Though FG borrowings are supposed to rise in Q3 2018, the DMO has continued to appear restrained with debt issuance. Even worse, the maturity profile over the rest of the year implies that the excess liquidity picture at the short end is likely to worsen over the rest of 2018. Simply put, local institutional investors are going to be faced with holding a lot of funds with not enough outlets to invest on the fixed income side of things. Under this environment, desperation might result in a reach-for-higher-yields gaining ascendancy which will put pressure on bonds. Assuming oil prices remain stable and of course no violent streak to Nigerian politics which thus far looks more like a football transfer window. The comedy on the political at least implies limited scope for the sort of political trouble that the remaining brave foreign investors in Nigeria’s debt markets, who are sitting in short term T-bills, like to avoid.
Figure 1: Naira Yield Curve
- OMO: Open Market Operations
- CP : Commercial Paper
- 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
- MPC: Monetary Policy Committee
- NBS: National Bureau of Statistics