Nigeria Fixed Income Weekly

The Week that was (January 7-11): CBN’s attack on system liquidity nudges short dated interest rates higher

Liquidity conditions remain tight: Last week, CBN continued its offensive on the level of Naira liquidity with total OMO bill sale of NGN365billion (15% of which were STABS). The tight liquidity conditions meant that the thermometers of interbank liquidity remained elevated over the week with average OBB/overnight rates at 24.02%/26.02% up from 17.5%/19.4% in the prior week. As a result, front-end yields along the Naira curve inched up (+15bps on average) to 13.21% (3M), 13.12% (6M) and 17.4% (1-yr). CBN maintained its stop rates for the OMO bills at 3M (discount: 11.9%, effective: 12.26%), 6M (13.5%, effective: 14.47%) and 1-yr (discount: 15%, effective: 17.64%).

For bonds, relatively low activity with thin demand from pension funds and offshore buyers continued to characterize market activity. Markets seem focused on the Q1 2019 bond calendar which should come out next week. In its absence, sentiments were bullish likely in response to the Q1 2019 NTB calendar which showed lower FGN borrowings. In all FGN bond yields closed the week largely flat (down 3bps) within the range of 14.9-15.53%.

Figure 1: Naira Yield Curve

jan 2019 ngn yield curve

Source: FMDQ, NBS

Q1 2019 NTB Calendar points to neutral FGN borrowing stance: The CBN released the NTB issuance calendar for Q1 2019 which would see the FG net repay NGN163billion. This is a reverse from Q4 2018, when the FGN issuance exactly matched maturities. The proposed reduction in NTB debt over Q1 2019 implies downward pressure for interest rates at NTB auctions, as they are likely to struggle to reach the levels obtained at OMO auctions.

CBN introduces brand new measure of money supply (M3):  In line with CBN Governor, Godwin Emefiele’s comments at the July 2018 MPC, the CBN has commenced reporting of a new money supply indicator M3 which adds OMO bill issuances to M2. This is a non-trivial change as it explicitly incorporates OMO bills (which is essentially credit to the CBN) into the reporting of monetary aggregates. In recent years, MPC meetings are typically characterized the paradox of CBN reporting that growth in monetary aggregates trailed CBN targets and then in the same breadth of speech CBN grumbling about having to deal with excess NGN liquidity in the banking system. With M3, one can now explicitly see the flaw inherent in M2 reporting in a Nigerian setting: it ignores the monthly monetary conversion of Nigeria’s petrodollars to Naira which OMO bills were meant to sterilize. With M3, we can now see a proper measure of the outstanding level of OMO liabilities which is a sort of proxy as to the scale of sterilization activity by the CBN of petrodollar inflows.

Figure 2: Monetary aggregates and OMO bill outstanding

m3

Source: CBN * October

The Week Ahead (January 14-18): Higher system liquidity, December 2018 Inflation

In the trading week ahead, system maturities climb to NGN781billion split between OMO (71%) and NTB (29%). In addition, several coupon payments are likely to flow into the system over the course of the week which suggests scope for an improvement in interbank liquidity.

Accordingly, there will be an NTB auction on Wednesday where the CBN, on behalf of the FGN, would look to rollover NGN225billion worth of NTB split as follows: 3M (NGN5.8billion), 6M (NGN26.6billion) and 1-yr (NGN193billion). The likely higher liquidity profile from maturing OMO and coupon payments also implies that the CBN should maintain the raft of OMO and STAB sales to keep money markets sufficiently tight.

Q1 2019 FGN bond calendar:  The DMO is set to release the Q1 2019 bond issuance calendar. In 2019, we have a total of NGN585billion in FGN bond maturities split between June (60%) and October (40%). Thus, we are likely to see a borrowing calendar which tries to put the DMO in a good cash position to pay down the June maturities unless they decide to use part of the November 2018 Eurobond proceeds to pay-down debt as against refinancing. In terms of preferred tenors, we could see introduction of a new March paper for FGN 2029 by March 2019 as the current 2028 maturities appear to be nearing the annual cap. In addition, we might see a shift in issuance away from the FGN 2021 towards the FGN 2023 and FGN 2025 where there are lower maturity obligations. In all, debt markets which have been looking for an excuse to turn bearish are likely to respond negatively in the event of a higher issuance profile.

Figure 3: FGN Bond Maturities by year*

fgn bond matu

Source: FMDQ, DMO * includes savings bonds maturities up until 2021

December 2018 Inflation: The NBS is set to release the December 2018 inflation report on Thursday and due to a lower base in 2017 I expect the headline number to print higher between 11.3-4% y/y (November: 12.28% y/y). The print will round off 2018 CPI reporting with the full year average likely coming in at 12.1-2% down from 16.5% in 2017. The strong disinflationary reading observed in 2018 is consistent directionally with my forecasts at year start for headline to slow to 11-12%. 2019 is pregnant with inflationary pressures over the second half where certain price adjustments are likely occur for fuel, electricity and the exchange rate.

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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