Bearish trends across fixed income, another Eurobond sale on the cards and Naira weakness persists
The week that was (April 19-22)
Money market rates remain subdued but bearish sentiments dominate NT-bill trading: Money market rates remained benign, closing the week at the 5-6% levels, as there were no major events that drove liquidity outflows. That said, secondary market trading in the Nigerian Treasury Bills (NT-bills) was bearish, as yields inched up 40bps, given a paucity in demand for bills as banks and asset managers continue to prefer short-term bonds (2-3yr) where yields remain at premium to NT-bills (9-10% vs. 3-4% for NT-bills). This positioning is consistent with market expectations for pick-up in interest rates over the rest of 2022 given the large fiscal domestic borrowing plan.
Finance minister delivers an about-turn on Eurobond borrowings: With no warning and in what is now looking like the norm, Nigeria’s finance minister Zainab Ahmed announced in a Bloomberg interview that Nigeria would seek to tap USD950million in another Eurobond sale over May. She followed this up with guidance that Nigeria planned to sell more Eurobond debt further down in 2022. The planned May sale as well as the March’s USD1.25billion sale would appear to be the concluding portion of the USD6.15billion foreign borrowing approval per the 2021 budget cycle of which the DMO was only able to sell USD4billion in September 2021. Given that the approved 2022 budget contains foreign borrowings of USD6.2billion, Nigeria could look to sell between USD3-4billion in Eurobonds in the latter part of the year.
Figure 1: Nigeria External Borrowing Composition
Source: DMO, Authors Computation
What is surprising about these announcements is that they run contrary to initial guidance provided by the finance minister in 2022 that the government had no plans to tap Eurobond markets. Indeed, this would fit a pattern with Nigeria’s fiscal policy chief wherein she would initially push the ‘our focus is on concessionary FX loans and not Eurobonds’ mantra even when planning was well underway for Eurobond sales with investor meetings and roadshows. Not sure who she believes she is deceiving? Forward guidance in the mud! Assuming the planned sales occur later in the year, Nigeria’s external debt will likely close 2022 around USD43-46billion and more importantly external debt mix would now be dominated by Eurobonds (45%) by my estimate – the first time since the historic Paris Club negotiations of 2005.
Bond yields close higher, but some duration buying following the Eurobond announcement: FGN bond yields closed the week higher, though at the market close of Friday, there was some buying activity as traders responded to news of a planned Eurobond sale in May. Eurobond announcements tend to spark of a buy-the rumour- sell-the-news reaction in domestic bond markets as traders then push the deceptive narrative that ‘Eurobond issuances would displace the immediate need for local borrowings’ which is false as Nigerian Eurobond sales are not substitutes for domestic borrowings. The approved budgets always separate the two items, but traders often push this narrative to drive activity. Given that the dovish CBN posture over Q1 2022 has kept short-term funding cheap, it makes sense for traders to look for an excuse to buy higher yielding long duration bonds to harvest income and look to trade in the sentiment around these announcements. This immediately dovetails into short-lived technical rallies though the bond auction next week could reset sentiments.
Figure 2: Naira Yield Curve
Naira pretends to fall at the IE window, but depreciation continues the unofficial segment: At the Investors & Exporters Window run by FMDQ, the closing value of the Naira fell to a NGN418.33/$ (-0.2% w/w) amid a decline in total turnover. Nevertheless, as I noted last week, don’t read too much into the IE window rates as there is a tacit peg on quotes at the segment and most trading activity is meaningless. Its interesting that the IE window, which was designed by the FMDQ to replace the old pegged system dictated by the CBN has ended up as the old system. In continuing to publish these numbers, FMDQ’s credibility as serious market driven exchange is being greatly damaged. Elsewhere, the Naira remained weak as media reports on the parallel market rate place the exchange rate at NGN590-600/$. External reserves continued to track higher (+0.2% w/w) to USD39.8billion as Eurobond inflows continued to push the 30-day average higher.
WB/IMF raises Nigeria’s growth outlook, the usual knock on Nigeria’s economic policy: At their Spring meetings, the WB/IMF raised their forecasts for Nigeria’s economic growth over 2022 from to 3.8% and 3.4% respectively despite a downgrade in Global growth forecasts. They both strangely cited optimism around stronger oil prices and a pick-up in output. My sense is these forecasts are playing catch-up after their disastrous performance in 2021 when both institutions shockingly kept under-rating the pace of Nigeria’s economic recovery after the lockdowns. On the other hand, the two agencies delivered a scathing assessment of the Nigeria’s FX management and petrol subsidy policies which they argue lay at the heart of persisting fiscal and USD liquidity imbalances. In response the CBN continued its unorthodoxy mantra while the finance minister glossed over these concerns noting the likely start of the Dangote Refinery.
Corporate Bond: Dangote Cement PLC sold NGN116billion worth of corporate bonds, well above its initial NGN50billion target as its order book came at 2.24x. The bonds were spread across 5,7 and 10year maturities with yields at 11.85%, 12.35% and 13% respectively.
The Week Ahead (April 25-29)
Into the last week of April, market focus will shift to the FGN bond and NTB auctions scheduled for the week. Likely FAAC credits and some coupon inflows will support overall market liquidity.
Likely higher rates at the bond and NTB auctions: At the monthly bond auction, the DMO would look to sell NGN225billion worth of debt evenly spread across the FGN 2025s, 2032s and 2042s. Given bank preference for short-duration we are likely to see bids supported for the 2025s while pension fund preference for long-dated assets to match their liabilities will see good demand for the 2042s. Given that it’s a new paper, we are likely to see strong speculative bidding on the 2032s as this auction establishes the coupon going forward. Overall, the auction is likely to be well bid. In terms of expectations, my guess is for clearing rates as follows: 2025s (10-10.05%), 2032s (12.4-12.5%) and 2042s (13-13.05%). On Wednesday there is also the matter of an NTB sale is on the cards with the DMO looking to rollover NGN121billion worth of NT-bills, we are likely to see the 1-yr tenor move higher given the bear trends in secondary market trading.