Nigeria Fixed Income Weekly

The Week that was (October 8-12):  – Yields rise on account of softer liquidity and borrowing calendar

  • Soft NGN liquidity drive markets higher: Last week was largely uneventful data-wise and with no scheduled debt sales, liquidity conditions dictated market movements. On this front, markets opened relatively soft following aggressive CBN sterilization at the end of last week. Though Paris club refunds helped calm nerves, Thursday’s OMO sale of NGN249billion strained system liquidity which pushed OBB/overnight rates to 19.2%/19.75% at the end of the week from 9/10% levels at the start of the week. This weighed significantly on the yields on the 1-year NTB, which were 34bps higher at 15.2%, while the 3M and 6M NTB yields closed lower at 12.66% and 13.27% respectively.
  • Prospect of FG borrowings drives FGN bond yields higher: In response to the Q4 2018 borrowing calendar which showed a 17% q/q rise in planned bond sales, local asset managers reversed the duration chase that had weighed on FGN bond yields in recent weeks. Bid-Offer spreads widened as the prospect of higher bond supply drove a fall in demand leading to an uptick in bond yields (+6bps on average). However markets also digested plans by the DMO to sell USD2.8billion worth of Eurobonds with approvals at the National Assembly.
  • DMO seeks legislative approvals for USD2.8billion Eurobond sale: Following the resumption of the National Assembly on Tuesday after an ‘extensive’ recess, the DMO had a chance to present its request for legislative approvals for Eurobond sale of USD2.9billion. This is not unexpected, as it was included as part of the fiscal deficit financing package of 2018 budget which was passed in June 2018. The delay reflects the longer than expected closure of the National Assembly. The Senate Committee on debt is expected to report back next week after which legislative approval should follow. In addition, the legislators moved to confirm the last outstanding CBN deputy governor slot which would see the Ade Sonubi, erstwhile head of the Nigeria Inter-Bank Settlement System Plc (NIBSS) assume the DG (operations) position.

The Week Ahead (October 15-19): Higher inflation and tighter liquidity conditions mean yield uptick ahead

  • In the week ahead, system maturities climb to NGN494billion (from NGN277billion) split between OMO (70%) and NTB (30%). The latter implies an NTB auction on Wednesday where the CBN, on behalf of the FGN, would look to rollover NGN147billion across the 3M (NGN5.8billion), 6M (NGN29.3billion) and 1yr (NGN112.5billion).
  • NBS is set to release September 2018 inflation report. We expect inflation to rise to 11.4-5% y/y from 11.23% y/y in August driven by pressures in the food basket on account of flooding which will adversely impact harvest.
  • Eurobond approval expected but timing on issuance is crucial: The Senate approval is also likely expected on Tuesday for the DMO’s planned Eurobond sale. However, when will the DMO tap global debt markets is crucial in view of the jump in 10-year US treasury yields to a seven year high of 3.2% last week which triggered a global sell-off. At a time of heightened political risk premiums on NGN assets ahead of the 2019 elections, prospect of a fresh Nigerian Eurobond supply in a tense EM environment implies very high pricing which may deter issuance in Q4 2018 at least. Unless of course the view on the USD switches from a bullish one due to rising US interest rates to a bearish one after the mid-term elections in November. If that happens, having your Eurobond approval in place may provide the flexibility needed to dive into markets but I fear pricing may be very expensive.
  • For local debt yields, given the tight liquidity levels at the close of last week, rates are likely to trend higher at the start of the week before moderating on Thursday. Bond yields are likely to continue the marginal inch up ahead of the monthly bond auction next week where traders will get a firm sense of the desperation of the DMO with regards to the bond calendar.

Figure 1: Naira Yield Curve

NGN yield curve

Source: NBS, FMDQ

Abbreviations

  • OMO: Open Market Operations
  • CP : Commercial Paper
  • NTB: Nigerian Treasury Bill
  • FGN: Federal Government of Nigeria
  • EM: Emerging Markets
  • 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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