A quiet week but mixed trends across the curve with a downtrend in bonds as Nigeria appears set to global capital markets for a Eurobond.
Short term rates inch-up on CRR debits, slight bullish trend in bonds on Eurobond news: As in the prior week, robust banking system liquidity continued to weigh on rates along the Naira yield curve especially the front end. NTB yields moderated 36bps w/w vs. a 9bps w/w compression for bonds. However, money market rates closed the week higher – surging to 20/20.5% after the debits for FX auction sales and CRR requirements were effected on Friday. Bond yields reversed a rising pattern following news on the approval by the Federal Executive Council that the DMO can go ahead to sell USD6.1billion (NGN2.3trillion) worth of Eurobonds. Albeit demand from real money accounts remain soft relative to offers from the short money accounts as the differential between bonds and interbank placement rates are not significant as obtained over 2020.
Figure 1: Naira Yield Curve
External reserve outlook on a stronger footing as FEC approves Eurobond sale and IMF allocates USD3.3billion SDR to Nigeria: Nigeria’s FX reserves maintained the uptrend, rising 0.5% w/w to USD33.6billion. At the IE window, daily trading averaged USD135million down from the USD159million in the prior week with the Naira holding steady at its NGN411/$ level. On the other hand, the Naira pared back losses from the prior week at the parallel market appreciating to NGN510/$ from NGN520/$ level after the CBN announcement of its decision to halt sales to BDC operators. The combination of SDR injections and Eurobond sales alongside higher oil price receipts suggest Nigeria’s reserves could move closer to USD42-44billion by September. This could induce greater USD supply by the CBN across all major FX markets. In the event that these improvements are accompanied by some adjustments to the spot exchange (towards NGN440-450/$) and some expansion in front-end interest rates towards 13-14% to shrink the negative real returns, then we could see a recovery in FPI inflows. If this sequence aligns, the parallel market rate will pale in significance.
The week ahead (August 9-13)
In the week ahead, system maturities are soft with only NGN59billion across NTB and OMO bill maturities which implies there will be an NTB sale on Wednesday which in view of robust market liquidity should see further moderation in yields. The CBN, on behalf of the DMO, is likely to maintain its pattern of overselling the 1yr NTB to take advantage of robust demand at the segment. This suggests room for further downside in 1-yr yields.
A trip down memory lane on NTB issuance and a Eurobond sale: YTD, Nigeria has sold NGN2.3trillion wroth of NTBs relative to maturities of NGN1.73trillion which implies net issuance of NGN549billion. Per FMDQ data, the outstanding of NTB stands at NGN2.59trillion. The net issuance is a deviation from the historical pattern of issuance roughly matching maturities i.e. net neutral borrowing at the short end of the yield curve and reflects a desire towards meeting the NGN2.3trillion domestic debt target for 2021 deficit financing. However, this route implies that the DMO is admitting failure on its 2018 plan wherein it sought to use proceeds of a Eurobond sale to reduce NTB debt. As a reminder, Nigeria issued Eurobonds worth USD3billion (N1.1trillion) in 2018 with the intention of using proceeds to retire treasury bills of the Naira equivalent under a bizarre plan to reduce debt service costs. The goal was to reduce rollover risk and crowding-out at the front-end of the curve which made limited sense at the time when CBN was the main issuer of short-term securities. I had written about the futility of the idea here and so after shrinking NTB debt in 2018, it is interesting to see that the DMO is now raising NTB via net issuance. The Eurobonds sold are yet to mature but the DMO is halfway through returning NTB issuance back to the levels at the time of the Eurobond sale in 2018.
I leave with this quote by John Maynard Keynes: It is the long-term investor who will in practice come in for the most criticism. For it is the essence of his behaviour that he should be eccentric, unconventional, and rash in the eyes of the average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.