Nigeria Fixed Income Weekly

The Week that was (August 6-10):  – Yields rise on account of political risk and hawkish noise from CBN

  • Political risk drives short lived spike in bond yields: Since the start of 2018, there has been a lot of talk about political risk on Nigerian assets and we had taste of its last week as the spat between the ruling All Progressive Congress (APC) and opposition People’s Democratic Party (PDP) following the recent defection of the Senate president cascaded into a replay of 2014’s invasion of the National Assembly by security agencies. In the uproar generated by the stand-off, Nigerian bond yields spiked with longer dated tenors pushing past the 14.5% level due to significant foreign sales. This was accentuated by the decision to bring forward the monthly bond auction by a week which had second order impact for short term yields. However, debt markets retraced towards the end of the week as domestic pensions funds snapped up the attractive prices on bonds. In all bond yields ended the week only 20bps higher.
  • CBN Deputy Governor talks up prospect of tightening: Amid the fall-out from the political environment, further support for bearish trends in debt markets came from comments by the Deputy Governor Okwu Nnanna on the sidelines of a conference in Egypt wherein he stated that the CBN would look to raise rates in the event of rising inflation. In typical shameful manner, the media headlines led by Bloomberg was to focus on comment that the CBN was in tightening mood ignoring the qualifier of in the event of rising inflation. Dr Nnanna is a rate hawk as he was the dissenting member who called for a 25bps hike at the May 2018 MPC when the CBN voted to hold rates by 9-1 at 14%. He likely joined other salient hawks at the July 2018 MPC.
  • Despite robust liquidity, short term interest rates rise: At the short end, though markets remained sufficiently liquid as the CBN only took out NGN377billion via its weekly OMO auctions relative to maturities of NGN452billion, the need to allocate funding for the bond auction drove sizable sales which pushed benchmark Nigerian Treasury Bills (NTB) up 40bps on average: 91-day(discount: 11.22%, effective: 11.54%), 182-day (discount: 12.21%, effective: 12.99%) , 364-day(discount: 11.47%, effective: 12.86%). Nevertheless, money markets remain sufficiently liquid with OBB and Overnight rates remaining in single digits.
  • Corporate debt issuance continued to gather steam with Access Bank and Dangote Cement announcing plans for fresh CP sales while Union Bank, Sterling Bank, Wema Bank and Mixta Africa Plc are all in town looking to raise capital via sale of 5-year bonds.

The Week Ahead (August 13-17): Yields to track higher on rising paper supply

  • In the new week, system maturities climb to NGN473billion split between OMO (93%) and NTB (7%). Paper issuance looks set to track higher as the FG commences execution of the 2018 budget with activity across both ends of the curve. Firstly, the DMO will seek to raise NGN90billion at the monthly bond auction via re-openings of the 5-yr (NGN25billion), 7-yr (NGN25billion) and 10-yr (NGN40billion). The DMO is also selling on a non-competitive basis: NGN36.25 Billion of the 5-yr and NGN34.15 of the 7-yr. In a similar vein, the CBN, on behalf of the FG, will look to sell NGN33billion in NTB paper split between the 91-day (NGN3.3billion), 182-day (NGN10billion) and 1-yr (NGN20billion). Given significant supply of sovereign paper over the week and an increasing slew of corporate activity, there is scope for the yield curve to move higher in particular the front end. The week also sees the NBS release the July 2018 CPI report which is likely to print at 11-11.1% y/y (June: 11.23% y/y) as base effects wear off.
  • Is Nnanna’s tightening talk the real deal or just an illusion? Following the Deputy Governor’s hawkish comments, debt markets, at least on the front end, are likely to dwell on the prospect of monetary tightening. However, I am not convinced in the light of the Governor’s comments at the July 2018 MPC about moves to offset the impact of sluggish credit growth via CP purchases. Only last week, Nigeria’s top two lenders (Zenith and GTB) recently reported their H1 2018 results which showed near double digit contraction in loan book and elevated liquidity ratios suggesting an apathy towards lending. Both banks have since downgraded their loan growth guidance for 2018.
  • Fundamentally, while inflation looks set to enter a bumpy phase as base effects wear off, underlying core inflation remains muted and appears set to go into single digits (June 2018: 10.4% y/y). All of this would suggest inflationary pressures remain well contained with consensus forecasts pinning CPI between 11-13% y/y over the rest of the 2018. In my view, the CBN is unlikely to raise MPR from the record 14% level, rather we might see a modest upward adjustments to the OMO discount rates whose movements have tracked inflation over H1 2018.

Figure 1: Naira Yield Curve

NGN yieldd curve

Source: FMDQ

Abbreviations

  • 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

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