The week that was (October 03-06) – Foreign participation and diminishing supply lengthens debt market rally
- Elevated liquidity continues to drive bullish sentiment: Despite an uptick in CBN OMO bill issuance with N422billion issued last week (as against N283billion in maturities), rates along the NGN yield curve continued to head south. Yields on benchmark Nigerian Treasury Bills (NTBs) slid on average 90bps: 91-day (discount: 16.03, effective 16.68%), 182-day (16.76, effective 18.27%) and 1yr (16.52, effective 19.62%). The trigger for the fresh bull run was the outcome of the primary auction on Wednesday where robust demand (with bid-cover of 4x) allowed for flexibility with the FGN upsizing the offer on the 1-yr by 56% while cutting back on sales on lower tenors. As in recent weeks, discount rates dropped on average 91-day (13.25), 182-day (15.5) and 1yr (15.73).
- Planned reduction in FGN debt issuance underpins bullish sentiment on bonds: In a similar vein, longer dated bonds continued to rally, with yields down on average 60bps. This followed the release of the Q4 17 bond issuance calendar by the Debt Management Office (DMO) which showed a 19% reduction to N330billion in planned sales. Notably, the calendar showed an excision of the 20-year bond and the moderation in borrowing is in line with the plan to ramp up foreign borrowings with a planned sale of $5.5billion in Eurobonds. It could also reflect higher than expected FGN borrowings at September and improving fiscal revenue profile. Evidence of strong foreign buying across the yield curve with Blackrock also confirming their activity in the local bond market.
- Improving FGN revenue picture drives improvement in DSR: The National Bureau of Statistics (NBS) began publishing Nigeria’s fiscal accounts on a monthly basis (with a release of fiscal accounts up until July) even as the Budget Office sprung to life with earlier than anticipated releases of the budget implementation reports for the first half of 2017. Though the H1 numbers show weak fiscal revenues and elevated debt-service to revenue (DSR) ratios, July showed a pick-up in oil receipts and seasonally strong corporate taxes. The uptick in oil receipts follows the return of exports along the Forcados export terminal after the Force Majeure was lifted in June and mirrors USD1billion oil receipts by the CBN in July. Consequently, cumulative debt service ratios dipped to 45% at the end of July from 62% in June 2017.
- In summary, despite the return of CBN liquidity curbing antics, increasing foreign activity is forcing passive domestic investors (read pension funds) to increase purchases along the NGN yield curve which is placing downward pressure on rates.
The week ahead (October 09-13) – Soft maturity patch could provide window for profit taking
- Relative to prior weeks, when at least system maturities were over N100billion, there is only a N62billion OMO maturity on Thursday. Following the aggressive CBN posture at the close of last week and the thin maturity in the new week, we could see a bit of profit taking. Indeed, over the next three weeks, liquidity levels are thin with only N84billion in OMO maturities which could see the yield curve rise slightly and provide fresh re-entry levels. That said, foreign buyers are around and the next big trigger is likely to be the inflation reading to be published next week. The base period effect looks thin over September and so I’m looking for monthly inflation at 0.8% (August 0.97%) and the annualized reading at 16% (August 16.01%).
In all, the likely drop in liquidity sets things up for brief lull in the positive run which could result in a slight upward pressure on rates across the yield curve.
eco215 
Hello. This is all very interesting analysis. Is there a way to contact you privately as I would like to run some things by you? Many thanks.
Hello Philip,
Thank you for your comments. You can send an email to eco215wordpress@outlook.com