The week that was (Sept 5-8) – Yield declines on improved liquidity
- Switch in OMO tenors and higher system liquidity drives yields lower: Benchmark Nigerian Treasury Bill (NTB) yields declined 63bps on average to 18.55% (91-day), 19.09% (182-day) and 21.02% (1yr) owing to a combination of improved system liquidity and market response to CBN signals about a desire for some downward adjustment in yields in response to the lower inflation. In terms of OMO issuances, CBN adjusted the duration on its offerings to 3M & 6M tenors in a departure from the 6M and 1yr tenors in the past. Having tried to issue shorter dated tenors (45-days) without success last week, the CBN settled on the 3M & 6M tenors which stemmed the tide of unsuccessful OMO sales. Consequently it sold N165billion of OMO bills against N135billion maturities vs a net repayment of N82billion in the prior week. The tenor switch had an impact on the 1yr paper which slid over 100bps on declining supply given preference by pension funds currently attracted to the steep hump along the yield curve. In addition, the May 2018 bond also re-priced nearly 100bps lower. OBB/Overnight rates spiked on Friday to 29%/30% from single digits at the end of last week due to bank prefunding for a retail SMIS auction announced on Friday.
- ..Bond market bulls gain ascendancy on improved liquidity: Bonds recorded strong buying at the start of the last week as demand was firm following the N100billion FGN 2017 maturities. The strong buying drove declines on the 2-3 year tenors. Other tenors declined from highs at the start of the week to between 16.47-16.81%.
- Nigeria exits recession: Last week, the National Bureau of Statistics (NBS) released the Q2 17 GDP numbers which saw Nigeria exit recession with a 0.55% y/y expansion driven by higher oil production. Worryingly, non-oil GDP growth slowed from 0.7% y/y in Q1 to 0.45% y/y in Q2 17 on a first time contraction in the telecoms sector. The slower non-oil growth implies growth trajectory is now much lower a sub 1% y/y reading for 2017.
In summary, the switch in OMO tenors on offer with withdrawal of the 1y bills, amid higher system liquidity, helped drive a bullish run along the yield curve
The week ahead (September 11-15) – Tamer fiscal issuance to keep yields subdued
- This week, there are two maturities: N133billion (OMO) and N175billion (NTB) maturity on Thursday. The NTB maturity implies there that CBN should release the Q4 2017 NTB issuance calendar with an auction on Wednesday. Also the Savings Bond Auction takes place this week with the FGN offering to pay 13.817% and 14.817% for 2 and 3 year bonds respectively.
- Be cautious at the NTB Auction: As I noted last week, towards the end of the year, NTB calendars are usually in net-repayment mode and I expect this calendar to show hints of tamer fiscal issuance at the short end of the yield curve for the rest of 2017. In the event that we do have an auction, my guess on marginal discount rates are as follows: 91-day ( 13.2-3%), 182-day (17-17.3%) and 1yr (17.5-17.7%).
- August 2017 inflation expectations: The NBS is also scheduled to release the August CPI report on Friday. August is the month before the start of the main harvest season in Nigeria and inflation tends to show traces of improvement in food supplies as early harvests make their way to local markets. This would imply further slowdown in farm produce inflation on a m/m basis. In addition, the last CPI reading showed evidence of lower energy costs on the transport index.
- In all, while a lower base effect from 2016 suggests inflation could spring higher, I’m leaning towards a further moderation in the m/m CPI reading (July: 1.2%) to a sub 1% reading. This should cascade into a slight moderation in headline inflation to 15.95-99% y/y for August by my calculations.
Over the rest of the week, we expect CBN to settle on the 3M and 6M tenors going forward which should drive retracement in yields with the 1yr under pressure. Expect further bullish activity in the event the Q4 17 Calendar signals net repayments.
Chart 1: Maturity profile
Source: FMDQ, CBN