Nigeria Fixed Income Weekly

The weeks that were (October 19-November 12)

Robust banking system liquidity induces a decline in short- term interest rates, but CRR debits return: Following a raft of inflows (FAAC plus bond coupon inflows) at the end of October and surprise NGN300billion credits/refunds at the start of last week, domestic system liquidity has been relatively robust, a development which pushed interbank rates into low single digits 1-2% and exerted a downward pull-on bank placement rates for large institutions towards 9-10%. The development also underpinned robust demand at the primary market auction (PMA) on Wednesday where bids were 3.8x the amount on offer (NGN151billion) which allowed the DMO to sell NGN196billion worth of bills at lower stop rates on the 1year (down 49bps to 6.5%). If markets were lulled into thinking the system liquidity was a sign of fresh monetary policy accommodation, the CBN cleared those doubts at it carried out an out of cycle CRR debit, estimated at NGN200-300billion, which promptly sent interbank rates higher on Friday: OBB (+12pps to 14.5%) and Overnight (+13.3pps to 15.25%).

Divergent trends across the Naira yield curve: Given the sizable liquidity build-up across money markets, the front-end of the Naira yield curve saw renewed buying attention, particularly on the 2023s and 2024s possibly driven by banks. However, along the belly of the curve, sentiment remained bearish likely reflecting market concerns over a pick-up in issuance following the DMO’s announcement of a sukuk sale of NGN200-250billion which will likely be on the 7-year tenor amid some subnational activity with Lagos’ planned NGN100-125billion bond. On the long end, concerns around a heavy fiscal borrowing plan in 2022 continues to drive offers on the 2050s. Overall, the short dated tenors saw sizable demand while the mid-to-long end continued to live under a cloud of potential selling pressures.  

Figure 1: Naira Yield Curve

Source: FMDQ

Money supply trends show that CBN remains in an expansionary mode: CBN released data on monetary aggregates at the end of September 2021 which showed that the apex bank maintained its accommodative monetary policy posture across financial markets. Looking at the key monetary aggregates, annualized growth across M3 (defined as M2 + CBN bills) & M2 (defined as M1 + time deposits) showed an expansion of 2.9% and 9.9% respectively. Muted trends in M3 largely reflects the impact of further redemptions of OMO bills (down 99% m/m) as central to the weak trend while strong credit growth (+16% annualized) continued to undergird growth in M2. The CBN continued to hold the line on CRR debits which remained unchanged at NGN10.1trillion from the prior month.

Naira strengthens at the parallel market, improving dollar supply picture: At the Investors & Exporters (IE) window, the naira weakened (-0.2% w/w to NGN415.1/$) but appreciated by 4.4% to NGN540/$ at the parallel market. The improvement at the parallel segment likely reflects improving liquidity at the official segments where average daily turnover rose 31% w/w to USD149million. Over the month of October, CBN inflows to the IE window hit USD790million – the highest level in 19months which underpinned improved liquidity at the segment. CBN interventions are via a combination of spot and forwards sales at NGN440-450/$ to offshore investors. Interestingly in its updated statistics bulletin, the CBN now estimates Naira fair value at NGN462/$ on a PPP basis at the end of June 2021 which implies that the present spot rate is overvalued by 10%, while the Naira is undervalued at the parallel segment by 17%. Given the improved external reserve positions as well as a slew of Eurobond sales totaling USD1.7billion by Nigerian banks over the last two months, its more likely that the Naira appreciates further at the parallel market. Unsurprisingly, Nigerian banks are starting to raise their monthly dollar limits on Naira debit cards.

The week ahead (November 15-19)

In the trading week ahead, market is likely to open tight with only small OMO maturities of NGN73billion. while markets will focus on the outcome of the monthly bond auction where the DMO has NGN150billion offer. In addition, the NBS is set to release the October 2021 inflation report.

Inflation likely slowed further in October:  The NBS looks set to release October’s inflation report on Monday. Looking at the run-rate of month-on-month (m/m) inflation relative to base effects from 2020, headline inflation looks set to maintain the declining trend. With the main harvest underway, food prices are starting to moderate across rural markets (for some grain and tuber crops) as these households become less dependent on market supplies. Furthermore, the Naira stabilized across parallel markets over the month which will likely moderate pressure on processed foods. Overall, my guess is for a headline CPI print of 16.15% y/y +/- 10basis points.

Mixed trends ahead of the bond auction: The monthly bond auction takes place next Wednesday and the DMO will look to borrow NGN150billion across the 2026, 2037 and 2050 tenors. Coming after the sizable bond sale in October and with an eye on its planned sale of NGN200-250billion worth of sukuk debt, the DMO is likely to signal softer rates to better manage markets. However, this auction also marks the last sale of the 2050s which could drive strong demand for the tenor.

Record NTB issuance sets the stage for higher rates over 2022: .  The DMO is on track for record NTB net issuance with the YTD number at NGN983billion, consistent with the pattern for Bonds. Though the DMO asserts this position is consistent with its target borrowing mix of 75:25% ratio for long-term and short-term debt (H1 2021: 77%: 23%), the pick-up in NTB sales runs contrary to the stated objective of the Eurobond sale of 2018 which was to reduce the stock of NTB instruments under a ‘plan’ to lower finance costs.

So what is driving the current run of NTB net issuances? In my view, the DMO appears to have used these extra NTB issuances to finance the July 2021 bond redemption and is likely massing the present sales to fund the January 2022 bond maturities. Beyond these, the DMO appears to have taken advantage of the liquidity hangover across debt markets brought about by CBN’s decision to oust non-bank financial institutions from its OMO auctions.  By my estimates, that CBN ouster unleased NGN4-6trillion worth of excess liquidity into domestic financial markets which after two years of sizable net debt issuance these monies are likely to have been exhausted. This less liquid system sets things up for 2022 where sizable FGN borrowings and still elevated inflation suggests that debt markets should return focus to this obvious mispricing as the DMO will need to rollover these issuances. A global tightening cycle is also likely to commence over 2022 and Nigeria might need to tighten domestic rates. In terms of markets, the current subdued level largely reflects CBN’s anchoring of its OMO and SPEB bills at financially repressed levels but ahead of a testy election cycle in 2023, the road ahead is likely one that leads to higher interest rates.

Figure 1: NTB Issuance and Maturity

Source: CBN

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