EUR 3.26 For Business Accounts Only

Fixed Income Update - March 2018

• CBN loses grip on naira liquidity. In line with trend in February when CBN tapered its pace of liquidity mop up, March was no exception as CBN net repaid N182.4 billion – its highest net repayment in nine months. Moreover, CBN’s increasing tolerance for naira liquidity was evident in its frequency of liquidity mop as it only sold OMO bills on five working days in March – a move last seen in November 2016.

• Liquidity conditions improve. Following a slight tilt in CBN’s liquidity posture to a more relaxed one, average O/N (Overnight) and OBB (Open Buy Back) rates for the month of March shed 445bps and 462bps MoM to 15.16% and 14.03% respectively.

• Bond yields bow to enhanced FG’s bargaining power. Bucking prior months in 2018 where marginal clearing rates at Bond auctions sustained its upward spiral, average marginal clearing rate at March Bond auction dipped 33bps to 13.51%. This tracked the successful issuance of $2.5 billion Eurobond which served as a boost to FG’s bargaining power and dampened its appetite for domestic borrowings.

• Treasury bill yields dip. Contrary to prior month where treasury bill yields buckled under liquidity strain from CBN’s sterilization, average treasury bill yields at the secondary market fell 36bps to 14.80% in the month of March. Added to this, following FG’s apathy for naira paper at PMA auction, NTB issuance of N280 billion was 32% shy of planned issuances for the period. As a result, average PMA stop rates dipped 34bps MoM to 12.77% in March.

• Outlook. Going forward, a pertinent question that emerges is how the CBN is likely to respond to the confluence of liquidity build up and a benign inflation outlook while keeping tab on yields to cultivate offshore interest. Given stability in USDNGN which allays currency fears, we believe the apex bank will continue to mop up excess monies in the system, albeit at lesser intervals and rates. Irrespective, we see CBN maintaining a floor for OMO rates at 13% in 2018. Given the possibility of a downward spiral in headline inflation in months to come, the long-held view on keeping real yield attractive which provided an ample justification for pegging MPR at 14% has become a mirage. Thus, we hold the view that the MPC could cut the traditional policy instrument by 200bps in H2 2018 in line with waning inflationary pressures. On the fiscal side, paper supply is similarly expected to remain around current levels, as the FG continues to skew borrowing in favor of cheaper external debt. In all, we are of the view that the tamer outlook for paper issuance over the rest of the year, benign inflation outlook and expected elevated liquidity levels provides legroom for further yield downtrends in the near term.