Bond yields revved up during the last one week pushed by sell-offs on public sale bonds (specifically the 25-year) the place yields crossed 13%. Though the Q2 2021 bond public sale calendar factors to a modest improve in borrowings by the DMO, the underlying driver of the sell-off seems to be compelled liquidations of extra short-money positions from the March 2021 bond public sale, amid one other short-lived pressure within the banking sector liquidity.
Liquidity squeeze throughout cash markets drive cash market charges increased: The step-down in OMO maturities over April implied that cash markets had been heading into a decent liquidity interval. Unlike the standard NGN200-300billion weekly maturities, April opened to solely NGN49billion in OMO maturities which implied tight funding positions throughout. Accordingly, interbank lending charges spiked to 30%, and although this subsequently receded, it remained in double digits. Placement charges for giant establishments have moved to 7-8% from 0-1% ranges at the beginning of 2021.
‘Margin calls’ set off sell-offs on the 25-year, resets curve to December 2019 ranges: The steepening alongside the Naira yield curve resumed final week with a median improve of 41bps (YTD: +439bps) pushed by over 120bps soar within the 25-year bond (2045). As I famous in my overview following the bond public sale, the DMO overallotment meant that everybody who wanted a bond bought on together with speculative bids from short-money accounts (brokers). The overallotment resulted in these short-money winners having extra bonds than their leverage financed positions may have permitted implying these extra positions wanted to be bought off. Unfortunately, the over-allotment meant restricted secondary market demand at present yield ranges. Compounding the state of affairs was the funding squeeze throughout the banks, who now utilized stress on these short-money positions to exit these public sale bond positions (a form of margin name). As consequence, these 2045 bond public sale winners quickly became determined sellers and flooded the market with presents searching for to hit the bids. Above 13%, demand predictably returned and helped calm markets. Beyond the 2045, there have been restricted determined presents on the opposite tenors which has resulted in a mispricing that ought to modify within the coming days. The lesson right here is in a decent liquidity atmosphere as we’re shifting in the direction of, bond public sale over-allotments maintain the chance of sell-offs by short-money merchants.
Figure 2: NGN Yield Curve
Q2 2021 Bond calendar: The Debt Management Office (DMO) launched the Q2 issuance calendar whereby it’s going to search to borrow between NGN450-540billion with the higher finish pointing to an additional NGN90billion price of gross sales. In my opinion, the bond calendars aren’t indicative of the evolution of precise borrowings because the DMO has proven a sample of being extremely delicate to market liquidity situations (with overallotments in coupon heavy months and beneath allotments throughout tight spells) whereas making most use of non-competitive bids. For proof look no additional than in Q1 2021 when the DMO bought bonds with face worth of NGN637billion properly above goal of NGN450billion. Perhaps shocking is the deliberate re-opening of the 2049s on the May public sale which seems to be odd however may point out the existence of a big non-competitive bidder who needs the tenor.
FX reserves proceed to trace increased, Eurobond conversations get underway: Foreign reserves continued to rise, up 0.6% w/w to USD34.9billion which suggests the affect of upper oil costs is beginning to feed by. This comes simply as information of events being appointed for a Eurobond sale gathers steam. Depending on the scale, and I count on a report sale, close to time period international reserve outlook seems optimistic. Throw within the upward changes in rates of interest and strikes to domesticate remittance inflows, Naira outlook seems on much less shaky footing than in current occasions. On this smart, the foreign money continues to carry across the NGN410/$ deal with within the NAFEX window (Friday: NGN409/$) and NGN482/$ on the parallel market.
The Week forward (April 12-April 16, 2021)
In the week forward, system inflows are skinny comprising OMO payments (NGN10billion) and NTB maturities (NGN70billion). As such there can be an NTB public sale on Wednesday and presumably an OMO sale on Thursday. In holding with the pattern in current auctions, the 1yr will seemingly take one other step nearer to parity with the OMO invoice with a possible cease charge of 8.5-9%. A flurry of huge company debt gross sales can also be underway led by MTN and Dangote Cement which may take out NGN200billion. Funding pressures will proceed to pressure banks to scale back buying and selling positions however on a lesser scale than within the prior week. In phrases of information releases, the NBS ought to announce the March inflation numbers.
Inflation seemingly accelerated in March to over 18%: The National Bureau of Statistics (NBS) seems to be set to publish the March 2021 inflation numbers. Though gas costs have stabilized after Nigerian authorities elected to proceed figuring out a decision with labour unions, meals costs have continued to speed up over the lean season. Though month-to-month traits seemingly remained sticky, the year-on-year comparability nonetheless factors to over 20% will increase in meals costs which cowl over half of the CPI basket. With this in my thoughts, my expectation is for the headline print to return in at 18-18.2% with the month-to-month print at 1.55-1.58%.
Term premiums have began to reasonable reflecting the NTB re-pricing however the subsequent large transfer on rates of interest is the May 2021 MPC with the important thing knowledge level of Q1 2021 GDP. In the occasion, Nigeria consolidates on the exit from recession with a optimistic progress learn, then I count on the CBN to hike financial coverage charges by 200bps accompanied by an upward adjustment within the 1-year OMO and May 2021 SPEB maturities to at the least over 12-13% ranges as a primary step in the direction of managing inflation expectations.