The Week that was (October 2-5): – Yields close lower due to higher NGN liquidity
- Yields decline as CBN adopts a ‘tactical’ approach to OMO sales: In a reverse from an aggressive stance towards system liquidity in September, when the CBN only net repaid NGN75billion (down from NGN904billion in August), the CBN kicked off October by avoiding OMO sales until Thursday. The radio silence which had commenced since last week, allowed for a significant build-up in system liquidity which provided an opportunity for the FGN to rollover NTB maturities at lower costs at the auction on Wednesday. Post the auction, the CBN appeared with an OMO auction to mop-up the excess liquidity on Thursday wherein it sold NGN553billion at its 13.5% stop rate which was well in excess of OMO maturities of NGN268billion. The sterilization thinned out liquidity at the close of the week driving a jump in overnight and OBB rates to 20-22% on Friday. Over the week, yields on benchmark NTB papers fell 31bps on average: 91-day (discount: 12.31%, effective: 12.70%), 182-day (discount: 12.53%, effective: 13.36%) and 364-day (discount: 12.99%, effective: 14.83%). Domestic institutional investors continued to pile into bond which is serving to drive yields lower (down 17bps w/w on average).
Figure 1: Naira Yield Curve
Source: NBS, FMDQ
- FGN rolls over NTB borrowings at softer rates: At the primary market auction for T-Bills on Wednesday, where the CBN, on behalf of the FGN, sought to rollover NGN133billion, the robust system liquidity implied that bid to cover at the auction climbed to 3.3x, the highest so far this year. As a consequence, bidding was more conservative which resulted in a slide in the discount rate on the 1-yr tenor to 13.33% (13.5%).
- Q4 2018 FGN bond calendar points to higher borrowings: The DMO released the Q4 2018 issuance calendar which shows a NGN45billion increase in planned borrowings to NGN270-360billion. The mid-point implies a 15% q/q rise in bond sales from actual Q3 2018 bond issuance. YTD, net bond issuances stand at NGN477billion implying some room for catch up with budgeted local borrowings for 2018 which stand at NGN793billion. The pick-up in bond supply is likely to drive bearish sentiments.
- Corporate bond activity re-awakens: Following the recent slide in bond yields, corporate debt issuance has re-gained steam with Flour Mills of Nigeria and Wema Bank Plc currently in the market for NGN30billion and NGN20billion respectively. The flour miller is looking to issue a mix of a 3-year bullet bond and a 5-year amortizing bond (12-month moratorium on principal) with IPT range of 15.5-15.9%. Wema, a Tier III Nigerian bank is looking to sell 7-year bonds (callable after 5-years) with IPT range at 16%-16.5%. Both issuers are BBB rated.
The Week Ahead (October 8-12): Much ado about a rising oil price, politics and tightening rhetoric
- In the week ahead, system maturities drop to NGN277billion (from NGN400billion) entirely made up of OMO bills. Given the thin liquidity levels at the close on Friday and raised borrowings in the Q4 2018 bond calendar, debt markets are likely to open the week on a bearish footing. The next key news for markets is the September 2018 CPI report of which consensus expectations are for inflation to print higher.
- Looking over the rest of Q4 2018, debt market sentiment is likely to start reverting back to fundamentals after political noise drowned out developments across key macroeconomic variables. Firstly, after some failed attempts at USD80/bbl, oil prices broke past the resistance in early October and forecasts of USD90-100bbl are gradually gaining tractions. Furthermore, as I noted in several posts, though inflation outlook is tilted towards the upside, the scale of increases remains appear relatively tame to the scale of the bond market sell-off. The yield curve is higher than December 2017 levels even though inflation is lower implying sizable real yields even as a large current account surplus suggests currency risks are likely to be well contained.
- So what factors have driven yields higher? First, higher yields on US treasuries with the 10-year rising over 3.2% last week imply increased global investor aversion to emerging and frontier market assets including Nigeria. Throw in the second point of heightened political risk given the incidents in August at the National Assembly and CBN’s fine on MTN the drivers of the offshore sell-offs appear evident.
- In Q4 2018, markets are likely to increasingly switch focus to political developments in the US with mid-terms in November where the prospect of a loss of the Republican legislative majority could provide an inflection point in the months long USD rally. Furthermore, with increased clarity on the Nigerian political picture ahead of 2019 (Atiku vs Buhari), investors now have a handle to navigate the February 2019 elections. A bet either way will have implications: if more people believe Atiku would win, markets are likely to turn bullish, if Buhari well its more of the same but oil is now above USD80/bbl.
- How will the CBN navigate this quarter? The textbook waving hawks appear to be gaining the upper hand at the MPC and with an eye on the slide in FX reserves, one cannot rule out the possibility of a pre-emptive hike in the MPR in November. If on the other hand, the saner dovish heads prevail at the MPC, I expect the CBN to simply continue to choreograph debt markets with upward adjustments in OMO yields as a way of diluting the downward drag on yields of the large OMO maturities (NGN2.7trillion) over Q4 2018.
- 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