Nigeria Fixed Income Weekly

The Week that was (November 12-16): CBN’s liquidity tightening continues to underpin higher rates

  • CBN maintains hawkish stance on system liquidity: For the second week running CBN continued on the path of liquidity tightening with OMO bill sales of NGN451billion in excess of OMO bill maturities of NGN424billion. This resulted in a rise in average OBB/overnight rates to 6.1%/6.9% from 3.9%/4.9% in the prior week. Accordingly, secondary market NTB yields continued track higher (up 20bps w/w on average) to 13.38(3M), 13.62% (6M) and 16.88% (1-yr). FGN bonds opened the week with a sell-off led by the 10-12year maturities before subsequently pulling back following news of Nigeria’s successful Eurobond sale. Overall, longer dated yields closed the week slightly higher. At the fortnightly NTB auction, the FGN took advantage of robust demand (bid-cover: 3.1x) to roll over NGN128billion at lower yields (-10bps on average).

Figure 1: Naira Yield Curve

NGN yield curve

Source: FMDQ, NBS

  • Nigeria re-enters Eurobond market for the second time in 2018, pays a higher price: Nigeria tapped global debt markets for USD2.86billion worth of Eurobonds over the week. The offering was split into three tranches to manage pricing: USD1.18 billion (7-yr) which was priced at 7.625%, USD1 billion (12-yr) priced at 8.75%, and USD750 million (30-r) priced at 9.25%. Though demand was strong with subscriptions of USD9.5billion, the pricing appears expensive when compared to February 2018 sale. In particular, while Nigeria paid 427bps and 456bps looking at credit spreads for the 12-yr and 30-yr in February, the DMO had to cough up 563bps and 589bps for both tenors in last week’s Eurobond sale. The higher pricing reflects a much more different global environment as a cocktail of higher US treasury yields, a stronger USD, ongoing trade wars and recent downturn in crude oil prices provided easy excuses to push issuance yield higher. In contrast to the amortizing nature of other bonds, this Eurobond sale reverted to the bullet bond repayment structure. Instructively, with the sale, Nigeria’s debt mix has now tilted away from largely concessionary to one which is commercial as Eurobond debt now accounts for the largest share of external borrowings (46%). Further increases in Eurobond sales will increasingly diminish the attractiveness of USD borrowings over NGN debt.

Figure 2: External debt components

external debt components

Source: DMO

The Week Ahead (November 19-23): October Inflation, November 2018 MPC and FGN bond auction

In the four-day trading week ahead, system maturities drop to NGN409billion (from NGN522billion) entirely made up of OMO bills. There will be a bond auction on Wednesday where the DMO will look to sell NGN105billion worth of bonds split across 5-yr (NGN35billion), 7-yr (NGN35billion) and 10-year (NGN35billion). The outcome is likely to be indicative of DMO’s position on local debt going forward following the Eurobond sale which translates to NGN857billion worth of deficit financing. In the event that DMO adopts a cost sensitive posture at the bond sale, it could spur a bullish tilt to bond yields driving further yield curve inversion.

October 2018 Inflation: After a delay, the NBS is expected to release the CPI report for October 2018 which I expect to print at 11.3% y/y (September: 11.28% y/y). Central to this view is the view that improved food supplies with the main food harvest underway in Nigeria is likely to drive the monthly inflation reading to 0.8% (September: 0.84%). This is still higher than 0.75% in October 2017. In the event of a stronger moderation in food prices to sub 0.7% levels, then we could see a dent to CPI for the month.

November 2018 MPC: At the penultimate monetary policy meeting before the 2019 elections (i.e. the last significant MPC before CBN moves into pause mode), my thoughts are that we are likely to get hawkish monetary policy rhetoric in a bid to support the NGN and an outside chance of a 25-50bps increase in the MPR.

Abbreviations

  • OMO: Open Market Operations
  • CP : Commercial Paper
  • DG: Deputy Governor
  • 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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