The Week that was (February 4-8): Mixed trends across the curve as CBN liquidity tightening pushes ST rates higher but strong offshore demand drives bond yields lower.
- But CBN maintains liquidity tightening leading to higher front-end yields: Interbank liquidity deteriorated over the week which resulted in a rise in money market rates with the OBB/overnight rates averaging 18.6/19.7% (last week: 10.3/11.2%). The knock-on effect accompanied by sizable OMO issuance of NGN643.19 billion underpinned a rise in Nigerian Treasury Bill (NTB) yields over the week. The 91-day climbed 26bps w/w to 12.29% while the 1-yr climbed 8bps to 17.53%.
- Strong foreign inflows drive bullish trends across bond markets: Following the dovish twist by the US Federal Reserve at its January 2019 monetary policy meeting, emerging/frontier market funds have witnessed strong inflows. No sooner than later, some of those inflows were going to come into Nigeria and last week, we saw strong evidence of that via the investors and exporters window. Though a lot of these inflows went after T-bills, some of these flows appear to be chasing duration risk as well as FGN bond yields declined 26bps on average with most maturities now trading at sub 15% levels.
Figure 1: NGN Yield curve
- Rise in foreign portfolio inflows underpin NGN strengthening: As stated earlier, the uptick in offshore inflows was evident in the rise in FX turnover at the I&E window which doubled from last week to USD1.7billion and resulted in a 0.3% w/w appreciation in the Naira to settle at NGN361.73/$. The NGN remained stable across other segments: Parallel (NGN361/$) and official (NGN306/$). FX reserves declined 0.5% w/w to USD42.9billion at the end of last week.
The Week Ahead (February 11-15): All eyes on the 2019 presidential elections, lower inflation and stronger GDP
- In the trading week ahead of the 2019 presidential election on Saturday, system maturities are as follows: OMO bills (NGN630billion) and NTB paper (NGN153billion). For non-sovereign paper, this week sees one commercial paper maturity: Dangote Cement Plc (NGN15billion).
- In terms of issuances expected during the week, there will be an NTB auction on Wednesday, where the CBN, on behalf of the FG, will look to rollover NGN153billion split as follows: 91-day (NGN3.3billion), 182-day (NGN10billion) and 1-yr (NGN140billion). In the corporate space, North-South Power and Flour Mills of Nigeria will look to close out respective sales of a NGN10billion 15-year bond and NGN6billion 6m commercial paper.
- Though the presidential elections will dominate the news releases, there are some macroeconomic data releases expected over the week starting on Tuesday when the NBS will look to publish Q4 2018 GDP growth. Oil production is likely to show a stronger print given stability over Q4 2018 and I’m looking for a 2mbpd number which should result in oil GDP growth of over 2% y/y ending the recessionary pattern observed since Q2 2018. Non-oil should even out at around 2.2-2.3% given all the divergent movements across agriculture and services. Overall, I expect Q4 2018 GDP to print around 2-2.3% for Q4 2018 with FY 2018 GDP print at 1.9-2%. In addition, the NBS will release January 2019 inflation report which I expect to moderate to 11.3-11.4% from 11.44% in December 2018.
- In terms of market direction, the yield curve inversion is likely to continue as offshore and local demand drives longer dated yields south while CBN liquidity tightening props up the front end of the yield curve.
- 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