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Fixed Income Commentary : Is STAB the new normal?

• CBN moves the needle. Last week Thursday, for the first time this year, CBN conducted a special OMO auction where it sold Stabilization securities (STAB) worth N7 billion. This came after subscription levels (N403 billion) at Thursday’s auction were 42% and 41% shy of planned offer (N700 billion) and OMO maturity on the same day (N684 billion) respectively. In addition to OMO issuances earlier in the week, CBN net issued N248.7 billion in the first week of December alone.
• The Elephant in the room. It all started in November, where CBN grappled with pent up liquidity in the system following higher OMO maturities (N89 trillion) and higher FAAC distribution (+13% MoM to N788.1 billion) and its reverberating effect at the Investors and Exporters Window.  As earlier posited, the repatriation of funds by offshore investors continued into November with a total outflow of $2.8 billion (vs. $2.0 billion in Oct). According to our analysis, of the $2.1 billion staged to mature in the month, a total of $1.6 billion was repatriated. This alongside demand from foreign Non-bank financial institutions and importers cascaded into widening of the demand-supply gap at the IEW to 49.3% MoM to $1.2 billion. Consequently, we saw depreciation of the NGN at the parallel market (N367.5/1$) and NAFEX (N364.1/1$) market which informed CBN’s decision to move the needle on naira liquidity (Total OMO sale last week: N932.7 billion).
• Scope for another STAB exist? Coming into December, with OMO maturities for the month at N3 trillion (vs N1.8 trillion in November), the Elephant in the room is pretty much around. In fact, we estimate FPI outflows to the tune of $1.6 billion (akin to November we assume that 83% of estimated offshore holdings for the month would be repatriated) which should leave the CBN with net outflow of $1.3 billion in December (vs $1.2 billion in November). In tackling this menace, we think CBN will remain fixated on keeping the currency stable at least pending when political uncertainties wane and crude oil inflow show signs of stamina. Consequently, we see scope for incessant liquidity mop up to wade off further attacks on the naira. However, in the event that CBN is unable to fill its coffers at subsequent OMO auctions—particularly on days where we have OMO maturities—we see room for further use of Stabilization securities to drive the apex bank’s quest of keeping the market illiquid.
• Room for higher Fixed income yields exist. Having laid the foundation for a tighter monetary policy in a bid to limit the outflow of offshore funds, we see room for higher fixed income yields in December. For us we think monetary influences will continue to trump downward pressure on yields emanating from expectation of thinner FG paper supply (ARM est. N2 billion in December vs N87.2 billion in November) after factoring the $2.8 billion and N100 billion Sukuk bond expected to come in Next week.