Nigeria Fixed Income Weekly

The Week that was (August 24-28):  – Shocker at NTB auction sends yields higher, but CBN surprises

  • Yields close higher at the NTB auction: Over the month of August, robust system liquidity implied that short term interest rates had remained insulated from the rising pattern observed in longer dated bonds where heightened offshore selling was driving bearish trends. The subdued pattern reflected a passive CBN posture largely indifferent to NGN liquidity across money markets and had resulted in boring primary market auctions of Nigerian Treasury Bills. As such going into the NTB auction on Wednesday, with NGN207billion on offer, nothing but an ordinary sale was expected. However, things ended differently with a surprise hike (+158bps on average) across tenors: 91-day (discount: 11%, effective: 11.31%), 182-day (discount: 12.3%, effective: 13.1%) and 364-day (discount: 13.05%, effective: 14.99%). So what changed? My thinking is that the rising in bond yields was forcing many pension funds and institutional local funds to liquidate money market positions to re-deploy into bonds. This resulted in a softer demand at the NTB sale with bid-cover ratio of 1x down from 1.5x at the last sale and forced the FG (not CBN) to pay more yield to fill its borrowing request
  • But CBN stuns with no OMO sale: In the day following the PMA sale, debt markets swiftly turned bearish as traders took the new level as the onset of monetary policy tightening. However, CBN cleared these doubts with a failed OMO sale on Thursday which allowed the NGN315billion in OMO maturities flow into the system unimpeded. This subsequently drove a retracement in yields as investors rushed to cover short positions. Subsequently, OBB and O/N rates declined by 467bps and 483bps respectively to close at 6.00% and 6.83%.
  • FGN Bond yields break past 15%: However, bond market bears who are not under any liquidity pressures quickly moved to reprice bond yields to reflect the 15% on the 1-year with sell-offs along longer dated papers. Consequently, bond yields climbed 34bps on average with the intermediate and longer dated tenors moving past the 15% resistance level.

Figure 1: Naira Yield Curve

NGN yield curve

Source: NBS

  • Weak Q2 2018 GDP report card: The National Bureau of Statistics released Q2 2018 GDP data which showed that the Nigerian economy expanded at 1.5% y/y (Q1 2018: 1.95% y/y). The slow-down stemmed largely from a contraction in oil GDP as production slid following downtime along Transforcados export terminal in May due to repair work. In addition, agriculture growth slowed significantly while trade and real estate remained in recession. Non-oil GDP growth posted a strong print driven by a pick-up telecommunications GDP. Overall, the sub-par GDP report card suggests the underlying economic picture remains weak despite stronger oil receipts and improved FX liquidity. The natural monetary policy prescription is for significant credit growth. On this front, the CBN remains trapped in a bi-polar vortex of pushing a tightening rhetoric in the media but maintaining a dovish body language across money markets and even actively trying to boost credit growth with the recently floated CRR based lending program. The present economic picture requires significant attempt to boost credit provision to stimulate capacity expansion but as with the original sin in Nigerian monetary policy, our policy makers remain obsessed with naira stability.

The Week Ahead (September 3-7): Coping with front end liquidity and are bonds now a good investment?

  • Into the first week of September and we have OMO maturities of NGN294billion and as well as a series of commercials papers: Nigerian Breweries (NGN15.8billlion), FSDH Merchant Bank (NGN4.5billion) and Lafarge Africa (NGN19.8billion). Given the hangover from the prior week and likely FAAC inflows, front end rates are likely to remain subdued given the CBN signal from last week’s OMO that it is not keen on pushing rates higher. However, bond yields are likely to continue tracking higher as offshore investors continue to ditch Nigerian bonds ahead of the 2019 elections and on continued EM/frontier market currency turmoil.
  • In addition, activities are expected to continue in the corporate market. Union Bank of Nigeria Plc closed its NGN20billion bond sale on Friday and announcement on allocations will be expected this week while Sterling Bank’s 7-year bond sale will close this week. Other transactions remain in the pipeline with Wema Bank, Flour Mills and Mixta Nigeria looking to tap debt markets for intermediate issues.
  • Are Nigerian Bonds looking good at current levels? As foreign investors retreat from Naira assets ahead of the 2019 elections and as part of the general EM/frontier market sell-off, Nigerian bonds yields have climbed to levels above December 2017 even though inflation has steadily declined over the period. Some had posited that this reflects concerns over likely inflation as the round of big base effects that supported disinflation ended in July. Looking at inflation, my forecasts on the bear case scenario are for CPI closing the year at 12.5% y/y and indeed most consensus views are for inflation to remain between 12-13% over the rest of 2018. Current bond yields are nearing the average real yield levels of 300bps over inflation attained during the single digit inflation episode of 2013-2015 when bond yields averaged 13-14%. These levels should naturally come to the attention of domestic institutional investors as they coincide with offering protection over long run inflation which imply preservation of purchasing power.

Figure 2: Average Real Yields on FGN Bonds

Real Yields

Source: NBS, FMDQ, Authors computation. * August 2018

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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