Nigeria Fixed Income Weekly

The Week that was (Feb 8-12, 2021)

Key highlights were the DMO’s announcement on Ways & Means, PMA sales and FX moves.

DMO concedes ground, CBN holds the line: At the primary market auction (PMA) on Wednesday where the CBN, on behalf of the DMO, sought to rollover NGN170billion worth of NTB maturities, demand remained soft with bid-cover of 1.2x concentrated mostly on the 1-yr. Though rates closed higher: 3M (1.00%, +45bp), 6M (2%, +70bp) and 1-yr (4%, +200bp) the DMO, in line with recent patterns, elected to redeem NGN39.6billion on the 1yr paper. At the OMO auction on Thursday, the CBN offered NGN170billion but sold only NGN169billion leaving prints unchanged from last week: 3M (7%), 6M (8.5%) and 1-yr (10.10%).

The reading from the DMO’s constant redemption suggests limited need of short term funding which is the intent for NTB instruments. Given the existence of a treasury single account and crucially, an ‘overdraft line’ from the CBN via Ways and Means, it would appear that absent the need to ensure a risk-free curve for short term borrowings, the DMO has limited need for these instruments and is likely to maintain the repayment pattern over the rest of 2021. On the other hand, as OMO bills remain barred for non-bank investors, intent of offering higher yields is to cultivate offshore portfolio inflows, though it remains to be seen if the current level is enough to attract a huge wave of these flows.

Yield curve steepening continues: Interest rates across the curve continued to move higher spurred by the outcome of the NTB auction, where 1-yr yields closed at 4%. Supported by strong bond market shorts (likely banks), the belly of the yield curve also moved higher with strong selling pressure across the 6-8year tenors (+150bps w/w) which worked to push the long end higher (+30bps w/w). The front end remained depressed given the still subdued yields at the PMA.

Figure 1: NGN Yield Curve

Source: FMDQ, NBS

CBN allows further NGN weakening at the Spot market: As discussed last week, the moves by the CBN across the NDF and OMO auction pointed to a tolerance for a weaker naira at the spot IE window. Like clockwork, the more trades were conducted at weaker levels with lows of NGN422/$ observed, though closing rates only moved to NGN400/$ from NGN398/$. FX turnover remains weak in the absence of CBN interventions which now appear largely at the weekly retail and corporate SMIS auctions. I expect the IE window rate to converge to NGN410-415/$ in the coming days. Over the medium term, strengthening oil prices (which hit USD62/bbl.), progress on FX borrowings (possibly via a large Eurobond sale) and success in rolling over/cultivating portfolio flows with the raised OMO yields will work to stabilize Naira outlook around NGN430-440/$. Instructively, in its Q3 2020 statistics bulletin, the CBN estimates Naira REER level at NGN431/$. Elsewhere, the Naira appreciated at the parallel market (+1.5% to NGN470/$). The recently published IMF article IV found the Naira to be 18% overvalued using the current account regression approach but to be fairly valued using the equilibrium REER approach with undervaluation of 1.3%.

DMO’s Medium Term Debt Strategy: The DMO announced the release of its medium term debt strategy which raised target debt-GDP ratio to 40% from 25%, with the increment reflecting plans to include promissory notes and the CBN Ways and Means. More likely the latter given its size with estimates at NGN10trillion (~7% of GDP). On this front, the DMO noted that it plans to sell directly to the CBN, NGN10trillion worth of bonds of a 30-year tenor with an amortizing principal structure and 2-year moratorium. The CBN could decide to sell these instruments into the market at times to manage liquidity. This off-market debt sale plan, as against the earlier speculated plan to sell these directly to the debt market, removes heightened fears about greater bond supply stoking bearish sentiments. Other takeaways from the debt strategy are a focus on greater reliance on domestic debt issuance, more concessionary loans and on the long end of the curve.  

The Week ahead (Feb 15-19, 2021)

January 2021 Inflation: The NBS is set to release the first inflation report card for 2021 and expectations are for further increases on the annualized print. However, following the retracement in food prices observed in January, I expect the monthly inflation print to slow from the 1.5-1.6% levels toward 1.3-1.4% levels reflecting the development in food prices. Nigeria re-opened the border in January and as food supplies are likely to have improved. I’m looking for a 16.1-16.2% print in headline over January. Not that markets will bother much as CBN’s focus on growth means negative real yields are going to hang around for some time.

February 2021 Bond Auction: Market focus will firmly be on the February bond auction, where the DMO would look to sell NGN150billion worth of debt evenly spread across the 2027, 2035 and 2045s. Markets have moved higher from the last auction and I expect DMO to remain market neutral. Accordingly, my forecast close are as follows: 2027 (9.80-9.95), 2035 (10.2-10.35) and 2045 (10.3-10.45).

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