The Week that was (February 25-March 1): Fixed income assets show strong signs of de-risking post the 2019 polls, Naira strengthens

  • Buhari’s win heralds a surge in FX inflows: Nigerian fixed income assets strongly de-risked following the peaceful conclusion of the 2019 elections which resulted in the re-election of President Muhammadu Buhari of the ruling All Progressives Congress to another four-year term. With oil prices looking set to clear the runway to USD70/bbl and the US Federal Reserve having dialed back on its tightening rhetoric, FX flows to Nigerian currency markets gathered speed with a surge in market turnover through the Investors & Exporters to USD3.9billion (+1.6x w/w) with daily average of USD790million. For context, in the week up to last week, cumulative turnover stood at USD9.4billion with a daily average of USD246million.
  • Naturally, the exchange rate appreciated 0.1% w/w to NGN361.03/$ but remained stable at the official (NG306/$) and parallel (NGN360/$). Importantly the 1-yr forward NGN rate gained 2% to NGN404/$ implying much improved investor expectations regarding the exchange rate. Naturally, the CBN has become a net buyer in the market and will likely seek to boost FX reserves over the next few weeks.
  • Sizable offshore flows trigger yield curve compression: Most of the FX inflows have been largely towards fixed income markets which has resulted in a build-up in liquidity in the financial system as well as a decline in money market rates: OBB (-3.1pps to 14.1%) & OVN (-3.3pps w/w to 15.3%). The flood of cash in the financial system was evident at the NTB and OMO auctions where the CBN was forced to trim clearing rates by 70bps to 14.3% for the 1-yr OMO bill. In the secondary market, NTB yields collapsed over the week: 3M (-130bps to 10.7%), 6M (–20bps to 13.6%), 1yr (-220bps to 15.02%). The strong foreign inflows have also weighed on FGN bond yields (-70bps) with the entire long end now largely below 14%.

Figure 1: NGN Yield curve


Source: FMDQ, NBS

  • Nigeria’s first Green infrastructure bond: North South Power – the operator of the 30-year BPE concession on the 600MW Shiroro Hydro Plant closed on its maiden bond issue wherein it raised NGN8.5billion at 15.6%. The bond is a first on many fronts: it’s the first 15-year amortizing callable corporate bond sale whose hydro nature meant that it qualified as a green infrastructure bond. But crucially, it was guaranteed by Infracredit which enabled it to have a AAA rating and for investors go down that tenor with a non-sovereign.

The Week Ahead (March 4-9): Strong offshore flows to continue fueling bond market bulls 

  • In the trading week ahead, we have around NGN250billion worth of OMO maturities as well as a NGN2.1billion Mixta commercial paper maturity on Thursday. In terms of events to watch out for, Access Bank Plc should close out on its NGN15billion Green Bond sale while the CBN should release the Q2 2019 NTB issuance calendar. The calendar is likely to show a market neutral borrowing position by the fiscal along the front-end of the curve.
  • In terms of market trends, the Naira carry trade is back! This means that the pattern of large FX inflows into debt markets as well as the attendant gravitational effect on yields should continue over the week. Bond yields could start testing the low 13%-levels given the wave of inflows, though markets are likely to watch out for signs of CBN signaling as to the level of the 1-yr OMO bill. Given the wave of inflows, the question of a possible Naira appreciation appears on the cards. However, I think the CBN will continue to favour NGN stability over strength by building FX reserves. For debt markets, we have a bull run, ride it!

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