Nigeria Fixed Income Weekly

The Week that was (November 26-30): CBN ramps up liquidity tightening, inverts yield curve further

  • Speculative pressures at the parallel market resurrect CBN’s liquidity aggression: Like a sleeping lion poked in the eye by pesky hyenas, CBN’s aggressive stance on NGN liquidity returned with a vengeance following the mid-week USDNGN depreciation at the parallel market. Given that the official and interbank windows are well supplied, the fresh pressures likely reflect a pick-up in speculative sentiments (following the steep drop in oil prices) and political related demand ahead of the 2019 elections. In any case, after announcing a new special window to ensure the parallel market is well supplied, the CBN moved to sap the source of speculative demand with increased frequency of OMO auctions (up from the usual once a week to three over the week) as well as a progressive increase in clearing rates. In terms of actual OMO sales, the CBN sold NGN652billion relative to OMO maturities of NGN452billion. Cumulative impact of the CBN aggression was the rise in front end rates over the week (up 23bps w/w on average) to 13.55(3M), 13.33% (6M) and 17.25% (1-yr).

Figure 1: Naira Yield Curve

NGN yield curve

Source: FMDQ, NBS

  • DMO announces NTB redemption plan in December: Consistent with the miserly pattern displayed at the November 2018 bond sale (where the DMO opted to only fill-up 34% of its planned NGN105billion offer), it announced during the week that the FG would not be issuing or rolling over any short-dated debt in December. Rather, it would redeem NGN78billion NTB maturities over December as well as carry out partial redemptions in January. As I noted last week, post the Eurobond sale, the DMO’s coffers are full and with likely policy execution inertia over the next three months, the fiscal side is likely to be hesitant towards domestic debt markets over the near term. Despite lower subscription at the fortnightly NTB auction with bid-cover of 1.8x (Last: 3.2x), the CBN, on behalf of the FGN, rolled over NGN151billion at flat-to-lower yields.

The Week Ahead (December 3-7): System maturities pick-up, CBN aggression to continue

In the trading week ahead, system maturities climb to NGN685billion (from NGN593billion) entirely of OMO bills. Following the DMO’s notice that it will not carry out any NTB auctions in December as it has elected to redeem December NTB maturities, focus will now be on the CBN to mop-up its own OMO bill maturities. Given the pressures at the parallel market, the CBN is likely to resort to aggressive liquidity curbing tactics and may push OMO clearing rates higher during the week.

A weaker oil price changes things:  Following the collapse in oil over November, as night follows day, pressures are likely to return to Nigeria’s external balances and by extension, the USDNGN. While the USD2.8billion Eurobond sale will help paper over cracks, my thinking is that the CBN will attempt to hold-out between now and the conclusion of the presidential elections in February 2019. To complement its defensive effort, the CBN will resort to increasingly frequent liquidity sterilization at higher stop rates. Given the sizable OMO maturity profile over the month (NGN2.33trillion), the CBN will be hard pressed to try to sequester the entire sum especially as there will be no fiscal supply at the front end over December. A couple of weeks back, I thought a 16% stop rate seemed implausible but at least over December, but I no longer hold this view, we could print 18% effective yield by year end.

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
  • REER: Real Effective Exchange Rate

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