Nigeria Fixed Income Weekly

Apologies for delayed publishing. Had an extended independence day holiday and forgot to send it out 🙂

The Week that was (September 24-28):  – Mixed signaling from the CBN leaves markets muddled

  • MPC holds but sounds largely hawkish: At the September 2018 MPC, the CBN elected to hold its key monetary policy rate (MPR) unchanged at 14% as well as other policy parameters constant by a 7-3 vote. The dissenting voices crowed for a 25bps hike in MPR while 3 out of the 7 hold votes demanded for an increase in the cash reserve ratio. The hawkish votes seem to be clinging to the textbook argument of hiking rates in response to the increase in headline inflation which the MPC admitted is supply driven as core inflation declined. The desire to raise CRR is bizarre as the same CBN is looking to deploy CRR liquidity via its CRR lending scheme. This again serves up as a reminder of the bi-polar disorder wracking the CBN wherein in one breadth it desires to tighten the MPR and then in the same line of thought seeks out methods of boosting credit growth.
  • But CBN turns silent across money markets: Despite the MPC tightening rhetoric, the CBN surprisingly did not issue any OMO paper during the week allowing around NGN260billion worth of OMO maturities and the carryover from the prior week flow into the system. Consequently, markets were torn between grappling for short covering and trading the hawkish MPC commentary which resulted in sideways trading across board with benchmark Nigerian Treasury Bill (NTB) tenors closing the week flat: 91-day (discount: 12.35%, effective: 12.74%), 182-day (discount: 12.39%, effective: 13.17%) and 364-day (discount: 13.46%, effective: 15.49%). FGN Bond yields however declined 10bps on average likely due to some portfolio rebalancing trades at the end of the quarter.
  • FGN borrowing rates rise in line with increased secondary market yields: At the FGN bond auction on Wednesday where the DMO had NGN90billion on offer, average marginal yields closed higher (+57bps m/m) despite higher subscriptions (1.76x vs 1.07x in August). The raised yields reflect secondary market levels on FGN bonds following the sell-offs which have pushed bond yields over 15%.

Figure 1: Monthly FGN bond auctions

Bond auction

Source: DMO

The Week Ahead (October 2-5): Relatively quiet short trading week.

  • In the short four day-trading week ahead, system maturities climb to NGN400billion (from NGN260billion) split between OMO bills (67%) and NTB (33%). Given the liquidity hangover from the prior week and expected FAAC inflows, CBN is likely to look to trim liquidity levels via OMO auctions. At the NTB auction on Wednesday, the CBN, on behalf of the FGN, will look to rollover, NGN133billion across the 91-day (NGN9.5billion), 182-day (NGN17.6billion) and 1yr (NGN106billion).

Figure 2: Naira Yield Curve

NGN yield curve

Source: FMDQ, NBS

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