Nigeria Fixed Income Weekly

The Week that was (September 10-14):  – Yield curve flattens out thanks to tacit CBN tightening moves

  • CBN raises OMO yields by elongating tenor on offer…: After the no-show at the OMO auction last week, the CBN returned to money markets with a fresh attempt at culling excess NGN liquidity on Monday though demand remained weak as markets sensed blood. With OBB/overnight borrowing rates at 4-5%, the CBN blinked and came up with another try on Tuesday with a return of the 1yr OMO bill tenor which cleared at 13.5% discount (effective: 15.6%). CBN’s re-introduction of the tenor and the higher rate on offer fueled increased market expectations of a tightening bias and played a key role in driving rates higher at the NTB auction. Nevertheless, the CBN pulled another No-OMO sale stunt on Thursday electing to repay the NGN241billion OMO maturity as it deemed the 14% minimum discount that money markets expected as too high. Thus, while CBN appears to be signaling higher rates, it remains uncomfortable with pushing yields further out.
  • Fueled by OMO pricing, debt markets force FG to pay more at PMA: As I noted last week, given the over concentration on the 1-year NTB in the planned NTB sales going forward (79% of planned borrowings in Q4 2018) and pressure on CBN to take out sizable OMO maturities in the rest of 2018, markets appears to be in stronger position to successfully bid up marginal clearing rates for the FG. This view played out at the primary market NTB auction, where the FG was looking to rollover NGN136billion (93% on the 1yr). Despite, higher demand at the sale with bids of 1.6x the amount on offer (last auction: 1x), yields closed higher on the 1-year tenor(+45bps). Specifically, markets priced in the higher yield on the 1-yr tenor for NTB using the closing yield obtained at the CBN OMO bill auction on Tuesday as the basis. Put simply, the CBN choreographed its views on the 1-yr OMO bill and markets danced along, forcing the FG to pay a higher rate at the PMA auction.

Table 1: Results of NTB Auction

Tenor Discount Effective Change (bps)
91 11.00 11.31
182 12.30 13.10
364 13.50 15.60 0.60

Source: CBN

  • Bearish patterns across secondary Markets: On account of the slight tightening bias from CBN, the front end of the yield curve swung higher in secondary trading as rates climbed by around 156bps on average with benchmark Nigerian Treasury Bill (NTB) tenors closing the week as follows: 91-day (discount: 13.61%, effective: 14.09%), 182-day (discount: 13.25%, effective: 14.18%) and 364-day (discount: 13.47%, effective: 15.28%). The pressures along NTB drove an upward repricing of bond yields: short maturities (2-3year papers) which climbed 30bps, but continued pension fund buying kept mid tenors flat (+4bps). For the deep far end of the curve, not much love though as the sell-off continued (+50bps).
  • Inflation moved up in August thanks to unfavourable base effects: On Friday, the NBS reported that inflation quickened to 11.23% y/y in August (July: 11.14% y/y) which was widely expected following the end of the favourable base effect disinflationary run in July. On a m/m basis, inflation slowed for the second consecutive month to 1.05% (July: 1.13%) which implied that the rise in the headline CPI print owed much to unfavourable base period comparison of August 2017 when m/m inflation printed at 0.97%. Looking at the sub-parts, core inflation slowed further to 10% (July: 10.2% y/y) while food inflation came in higher (13.16% y/y vs 12.85% y/y in July) reflecting pressures from imported food as farm produce by my estimate slowed in line with early harvests. YTD inflation has averaged 12.55% y/y (2016: 16.5%)

In all, in a reverse from the normalizing trend over August, it appears that the move to introduce the 1-yr at higher yields served to reprice front end rates higher, resulting in a reversion of to the atypical flat shape of the NGN yield curve. Though inflation nudged higher, Nigerian monetary and fiscal authorities are offering local and foreign investors average real yields of 390bps along the NGN yield curve. This is despite the existence of large current account surplus in H1 2018 which should imply a greater ability to manage the currency for the CBN and less financing pressures for an FGN who are facing prospects of spending nearly 50% of its revenues on financing debt. ‘Genius’ level economic policymaking!

Figure 1: Naira Yield Curve

NGN yield curve

Source: NBS, FMDQ

The Week Ahead (September 17-21): CBN tightening provides fresh fire for front end yields to track higher

  • In the trading week ahead, system maturities rise to NGN400billion (from NGN377billion) split between OMO bills (55%) and NTB (45%). In addition, we see one CP maturity: Access 270-day (NGN33billion).
  • The NTB maturity implies an NTB auction on Wednesday where the FG will look to rollover NGN182billion – 92% of which is the 1-year bill. This implies scope for a replay of last week and markets will look to push the 1-year paper higher. If CBN looks to cull liquidity at the start of the week with fresh OMO sales, then the thinner liquidity levels might force the FG to pay close to 14% on discount for the 1-yr given that markets sense blood. Second order impact of such a move will likely see FGN bond yields move towards 15.5% levels as markets fully reprice to reflect the impact of raised rates at the front end.
  • Clearly the optics appear to be pointing to monetary tightening driven by what appears to be flimsy reasons: bear case inflationary expectations are likely to settle around 12% to which the policy rate of 14% sounds reasonable. Exchange rate pressures due to EM/sell-offs look more manageable in the light of an oil price stuck between $70-80/bbl. The only real worry is that of political risk premiums and the recent witch-hunt of MTN led by the CBN with the latter likely to torch off an exodus by foreign investors concerned over the legitimacy of the Certificates of Capital Importation (CCI) as most FPI make use of the affected banks. Another case of ‘genius’ level policy making by Nigeria’s economic policy managers! Under this atmosphere, all manner of excuses to sell off NGN debt assets are now on the table which will result in higher and flatter NGN yield curve.

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
  • PMA: Primary Market Auction
  • FAAC: Federal Accounts Allocation Committee
  • I&E: Investors and Exporters Window
  • MPC: Monetary Policy Committee
  • NBS: National Bureau of Statistics

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