The Week that was (March 4-8): Yields climb in response to CBN signaling, but lower paper supply on the cards
- CBN steps up OMO issuance to nudge yields higher: Following the relapse in yields in the prior week, the CBN was hard-pressed to indicate its preferred level for the yield curve in a bid to retain foreign interest in Naira debt. Over the week, the CBN duly obliged via sale of NGN809billion worth of OMO bills relative to only NGN229billion in OMO maturities. The pick-up in CBN liquidity mop-ups was to counteract the impact of FAAC inflows (NGN340billion) and rising liquidity across money markets which had seen money market rates move trend south: (OBB: -412bps w/w to 9.97%, OVN: -420bps w/w to 10.95%). To spice things up the CBN lengthened the tenor of paper offerings to 202-days from the usual 180-190days but retained discount rates at 13.44-13.45% (effective: 14.4-14.5%).The net impact of the raised CBN aggression was a pick-up in yields across the front end of the curve (+82bps w/w to 12.42% (3M), 14.42% (6M) and 15.03% (1-yr). In a similar vein, FGN bond yields inched up 30bps across the curve to above 14% levels.
Figure 1: NGN Yield curve
Source: FMDQ, NBS
- Dovish signals from NTB and FGN borrowing calendars: We had two calendar releases over the week. Firstly, the CBN, on behalf of the FGN, released the Q2 2019 borrowing calendar which showed a net neutral borrowing stance over the quarter. Specifically, the FGN seeks to rollover NGN503billion split across the 3M (NGN80billion), 6M (NGN153billion) and 1-yr (NGN271billion). In addition, the DMO lowered its planned borrowing plan from its initial guidance with a 30% reduction on the 10-year tenor offering in the prior release.
- FX inflows normalize ahead of gubernatorial elections: FX inflows normalized from the elevated levels in the prior week with a 32% w/w drop to USD2.7billion. FX reserves picked-up (+0.7% w/w to USD42.6billion) and the NGN continued to strengthen across the IE window (+0.3% w/w to NGN360/$) and parallel market (+0.4% to NGN358/$).
- Technical corporate bond default? During the week, media reports broke regarding the default in coupon and principal payments on March 5, 2019 by Municipality Waste Management Contractors Limited (MWMCL) on the NGN50billion Bond issued in 2017. MWMCL was the SPV set-up by the Lagos Ministry of Environment and the Cleaner Lagos Initiative to fund VisionScape – a refuse management company which was supposed to handle refuse in Lagos State. However, the project ran into political trouble in 2018 and the state legislature placed hurdles in the path of Lagos State Government and Vision Scape. The bond was guaranteed by the Lagos State Government via an Irrevocable Standing Payment Order (ISPO) on the states internally generated revenues (IGR) not its FAAC allocations. Though the coupon payments would later be made on the 6th of March 2019, the principal component as the bond is an amortizing issue was delayed with talk about payment in the week ahead. Though a lot of details remain cloaked in uncertainty, the issue looks bad for Lagos which is often regarded as the only sub-national issuer with a strong track record. The state has NGN80billion principal payments due in November 2019 and it will be interesting to see how the market views any plans to refinance this paper in the light of the technical default.
- Elsewhere, Access Bank closed out on the sale of its 5-year NGN15billion green bond with issuance at 15.5%.
The Week Ahead (March 11-15): Yields to remain rangebound, flattish inflation reading
- In the trading week ahead, we have around NGN89billion worth of NTB maturities as well as a NGN216billion worth of OMO bill maturities. In the corporate space, Coronation Merchant Bank’s NGN19billion commercial paper matures over the week. Given the NTB maturities, there will be an NTB sale on Wednesday where the CBN will auction NGN5billion (3M), NGN14billion (6M) and NGN71billion (1-yr). The NBS will release the February 2019 inflation report on Friday. Inflation is likely to remain stuck in the going nowhere region of 11.3-11.4% print for the month.
- 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