The week that was (July 31-August 4) – CBN continues offensive on system liquidity
- CBN STABs again: After a one-month hiatus, the CBN resumed issuance of stabilization securities with a NGN250bn sector wide debit last week Tuesday at a slightly higher discount rate of 17.1% (vs 16% previously) on the 6M tenor. The development alongside heavy paper issuance by the CBN with NGN366bn worth of OMO bills against NGN85bn maturities helped drive OBB and O/N borrowing rates to 22% and 22.5% respectively from single digit levels at the close of the prior week. Importantly, the STAB issue followed loosening of curbs on FX trading after the CBN harmonized interbank USDNGN quotes with the I&E window rates which resulted in a 14% drop in the NGN to 366.
However, the tight liquidity conditions did not translate into higher interest rate across benchmark NTBs, where yields remain trapped in the going-nowhere range of 19-23%: 91-day (up 10bps), 182-day (down 40bps) and 364-day (down 10bps) to 18.96%, 19.27% and 22.79% respectively.
- No surprises at the primary NTB auction: As we have come to expect, the CBN liquidity tightening had no impact on events at the primary auction where the FGN rolled over NGN229bn at discount rates virtually unchanged from the last auction. Bid-cover at the auction stood at 1.33x (last auction: 1.55x) largely driven by over-subscription at the ‘ungamed’ 364-day tenor (1.55x). For the other segments, the ‘Greater fools’ bought the 91-day and 182-day tenors at discounts of 490bps and 90bps to secondary market yields.
- Bonds trend higher amid trade settlement issues: In line with the pattern in recent weeks, bond yields continued to see continued sell-offs. That said, as noted last week, the market traded only indicatively for the first few days due to issues of unsettled trades following problems with the CBN settlement system. Trading activity picked up by Thursday and Friday with sell-offs across. Key moves over the week were on the 3-year (up 33bps) and 20-year bonds (up 17-20bps).
In summary, CBN’s resumption of STAB issuances, and willingness to raise rates on them, reiterates an intent to keep a tight lid on system liquidity to curb USD demand in an increasingly flexible FX market.
The week ahead (August 7- 11) – Sideways trading for NTBs, but bond sell-off to continue
- In the week ahead, the FGN savings bond auction takes place at announced rates of 13.54% and 14.54% for the 2-year and 3-year tenors. Elsewhere with no scheduled NTB or bond auctions, paper supply is limited to the now permanent OMO auctions.
- Increased flexibility in FX market to spur further liquidity tightening: Last week, the FMDQ began allowing banks submit quotes reflective of the I&E window exchange rate which underpinned a ‘depreciation’ in the value of the NGN at the interbank. This move to harmonise reported rates is likely to be accompanied by CBN measures to curb NGN liquidity via fresh OMO or STAB issues. However, as rates are effectively at the upper band of the 19-23% range, markets are likely to trade sideways. Elsewhere, thinning PFA interest for longer dated instruments segment should continue to see bond yields continue their march upwards.
In terms of rate direction, NTB yields are likely to remain stuck in the 19-23% range while bond yields are likely going to continue to test new highs.
The chart of the week, I’ve been looking at outstanding CBN bills (which include all CBN security issuances). This year, the outstanding obligation now exceeds total reserve money and are now the single largest obligation on the liability side of CBN’s balance sheet. It also exceeds outstanding FGN short term obligations at N3.6trn. At some point, when FX markets stabilize and inflation drops below 12% y/y the CBN would be under pressure to unwind this position as the costs become unbearable from a profitability standpoint. This potential unwinding could be steep, if accompanied by rate cuts, given the size of CBN securities issuances.
Rising CBN OMO Bill Liabilities
Source: CBN *June