The Week that was (October 29-November 2): – Yield curve inversion deepens
- CBN holds OMO rates constant but switches to net liquidity withdrawal: In a reverse from the prior weekly pattern of net liquidity injections, the CBN switched to net liquidity sterilization last week with issuance of NGN518billion of OMO bills relative to only OMO maturities of NGN328billion. However, the CBN maintained the widely watched 1-year OMO stop rate from last week at 14.5% (effective: 16.84%). The pick-up in OMO issuance reflects a build-up in system liquidity following FAAC inflows during the week which pushed money market rates lower with OBB/overnight rates averaging 7.5/8.9%, down from 14.74/15.1% in the prior week. The impact of the liquidity surfeit blunted the impact of hawkish signaling by CBN as NTB yields closed the week on average 6bps lower with the 3M and 6M experiencing declines of 82bps and 19bps respectively to 12.2% and 13.18% respectively. The 1-yr NTB closed marginally higher 16.46%.
- Bull curve steepening on renewed offshore bond sales: Reflecting concerns over renewed CBN tightening following the uptick in the 1-year OMO bills as well as fresh offshore dumping of bonds, segments of the bond market repriced higher led by the 10-12year tenors, which sold off, with a 25-34bps rise in yields. On average FGN bond yields closed the week higher (+26bps w/w). The rise in long term interest rates (i.e. FGN bond yields) amid a muted pattern in short dated interest rates (i.e. NTB yields) is often referred to as a bull curve steepening. The reverse which we’ve seen recently along the Naira yield curve as short-term rates rose quacking following the hike in OMO rates by the CBN is called bear curve steepening.
Figure 1: Naira Yield Curve
Source: FMDQ, NBS
- PMA Auction Report card: At the fortnightly NTB auction on Wednesday, the FGN refinanced NGN145billion NTB maturities at higher yields than the prior auction: with the discount rate of the 6M and 1-yr tenor up 80bps and 95bps to 13.49% (effective: 14.46%) and 14.4% (effective: 16.81%) respectively. The 3M tenor was rose 2bps to 10.98% (effective: 11.28%). Given sizable liquidity levels during the week, bid-cover ratio at the auction was higher at 1.81x (last auction: 1.38x).
- CBN H1 2018 report card shows tamer fiscal deficit: The CBN released a draft economic report for H1 2018 which showed that gross fiscal revenues were up 47% y/y to NGN4.4trillion (FG share was NGN1.8trillion: +24% y/y). However, the gross revenue reported was 34% below target. On the expenditure side, the CBN estimates fiscal outlay at NGN2.6trillion (down 21% y/y, 46% behind target) which puts the fiscal deficit at NGN787billion (down 15% y/y) and also below target of NGN921billion. In any case the budget passage came late in the period (June), so one cannot read much meaning into these numbers but the pick-up in revenue numbers provides evidence of the feedthrough to fiscal revenue coffers from the upward swing in crude oil prices in H1 2018. This would seem consistent with a reluctant approach towards debt in the first half of 2018 by the DMO when it net repaid borrowings on aggregate.
The Week Ahead (November 5-9): Softer liquidity likely to drive rates higher
In the week ahead, system maturities decline to NGN376billion (from NGN527billion last week) entirely of OMO bills. In addition, this week sees the maturity of Sterling Bank Plc’s NGN25.4billion commercial paper (Issued in Feb 2018) as well as GTB’s 6% USD277million 5-yr Eurobond (issued in 2013). Overall, NGN market liquidity is likely to be thinner, which suggests enough room for front-end yields to rise further over the week. But as I have noted in recent weeks, the yield curve is well above levels in Q4 2017 when inflation was way higher which suggests a dislocation due to political risks and CBN tightening in defence of the exchange rate. Post a peaceful conclusion to the 2019 elections, the removal of the political risk premiums, assuming oil prices hold at current levels, will likely drive a retracement in level of the yield curve as foreign portfolio investors re-ignite interest in NGN assets.