Nigeria Fixed Income Weekly

The Week that was (January 11-15, 2021)

The week was all about action on the long end of the Naira yield curve, where bears pushed interest rates higher in expectation of higher government borrowings. However, the DMO stunned everyone by revealing a strong hand at the PMA and with the Q1 2021 borrowing calendar. Inflation maintained its upward track in December and while the food price pressures appear to be slowing down, lingering effect of the 2020 shocks should keep inflation elevated in H1 2021 (16-18%). 

Surprise redemption at the NTB auction: At the fortnightly PMA where the CBN, on behalf of the FGN, sought to rollover NGN232billion in NTB maturities, demand was modest at 1.2x despite relatively robust system liquidity. A lot of bids where generally higher, indeed the clearing rates all moved up 3M (+47bps to 0.50%). 6M (+50bps to 1.0%) and 1yr (+29bps to 1.50%) but the big shock was that rather than rollover there was the announcement that around NGN125billion worth of maturities would be redeemed. This repayment is a deviation from the pattern and the calendar and is surprising. It could imply that the DMO is either trying to reduce ST borrowings in favour of the long end (which holds bullish connotations for T-bills if repeated) or was trying to show markets a strong hand to drive better alignment. Interestingly, the 3M bill closed in line with where CBN Special Bills were issued at which lend credence to the latter argument that Nigeria’s economic managers are trying to align front-end yields going forward after the chaotic breakdown in 2020 and are still in a low-rate mindset.

Q1 2021 debt calendar comes bang in line on size, but slightly off on tenors: Exactly in line with my call last week, the Q1 2021 bond calendar showed a pick-up in the mid-point of issuance to NGN150billion (contrary to the NGN240billion rumour which soured markets) evenly split across the 2035s, 2045s and surprise a reintroduction of the 2027s (I was expecting 2050s). The bond market was fervently bearish last week as many proprietary traders who had built up positions over December sought exit amid speculation of large securities supply. They headache was likely compounded by shorts who sought to play on the rising rate thesis by pushing yields higher. It was good relief to see the calendar which implies planned borrowings of NGN450billion relative to bond coupons of NGN482billion and suggests limited upside to rates. That said, the DMO is likely to deviate from plans and take up more debt in the event of favourable auction yields. However for January, my take is that the chances are high that DMO might be willing to follow on from the NTB auction, by significantly underselling at the auction to send a signal. Over its 20-year history, the DMO is now headed by someone who is an adept of local debt markets and we have seen this expertise come to the fore unlike in the past.

Inflation maintains its uptrend supported by some base effects: The National Bureau of Statistics (NBS) released the December 2020 CPI report which showed that inflation accelerated to 15.75% y/y (November: 14.89%) with food at the fore front (+126bps to 19.56% y/y), while core climbed more modestly (32bps to 11.4% y/y). However, monthly inflation for December printed at 1.61% just 1bp higher than November implying that the headline acceleration largely reflects adverse base effects from 2019 (December month: 0.8%). The slowdown in the monthly print reflects flat trends in food prices with farm produce readings generally softer which appear to suggest that momentum in food prices appear to be easing.

Over 2020, inflation averaged 13.2% (2019: 11.4%) with the increase reflecting the combined impact of food price pressures (a fallout of below par crop production due to covid-19 restrictions, insecurities issues etc) and increments to fuel and electricity prices. In 2021, my prognosis is for lingering effect of these shocks to keep inflation elevated at 16-17% over the first half of 2021 before strong base effects over H2 drive a moderation to 13-14% levels. In all, inflation likely to average 17.5% (+/-50bps). 

Figure 1: 2021 Inflation Forecasts

Source: Authors calculation

Reserves maintain uptrend but Naira softens within CBN’s peg: Nigeria’s FX reserves posted another 1.1% w/w gain to USD36.4billion which given the speed of the rise provides strong support to the argument that this largely reflects BOI loan proceeds (USD1billion) amid generally  supportive trends in oil prices (USD55/bbl, down 1.5% w/w). On the exchange rate, the Naira softened (-0.29% to NGN393.5/$) despite a pick-up in CBN interventions which has bolstered activity at the IE window (daily turnover averaged USD76million vs. USD41million in the prior week). Elsewhere the currency weakened slightly at the parallel market (losing NGN2 to NGN474/$ while it remained flat at the official at NGN379/$. 

The Week ahead (January 18-22, 2021)

In the coming week, system inflows remain strong: OMO maturities (NGN226.31 billion) and FGN bond coupon payments (NGN337bbillion) which broadly suggests downward pressure interest rates. All eyes will be focused on the first bond sale of 2021 where the DMO has NGN150billion on offer evenly spread across the FGN 2027, 2035 and 2035 bonds.

DMO to undersell: Given the increase in secondary market yields relative to where market was at the December 2020 bond sale, it is largely expected that the January auction yields will be higher. The key question is whether the DMO will sell higher relative to where the secondary market is in order to fill up its borrowing till or call the market’s bluff by underselling as it did at the NTB auction. My suspicion is that the latter is more likely as the DMO appears intent on not signaling higher interest rates which makes the option of underselling very appealing. The year is still new, oil revenues are above target, a Eurobond plan is likely in the offing and if all fails the CBN back-up arrangement is still on the table.

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