Monthly Fixed Income Review For January 2019

February 10, 2019/Zedcrest Capital Ltd

Market Review

Sizeable Coupon Inflows Pressure Bond Yields Lower

The FGN Bond market opened the year on a slightly bearish note as yields retraced from the significant bullish sentiments which characterized the later part of the previous month. Yields however resumed a downtrend, with the most demand witnessed in the week prior to the January FGN Bond auction, as sizeable coupon inflows of c.N223bn on four different maturities spurred renewed demand interests from the local PFAs, with demand pressures further accentuated by the relative undersupply of bonds at the previous bond auction in Dec 2018. Yields consequently declined by c.20bps from an average level of c. 15.35% as at 31-Dec-18 to c.15.15% as at 31-Jan-19. The most decline was witnessed on the long end of the curve (36s & 37s) which compressed by c.50bps given the DMO’s continued limitation of its Bond Auction offers to the 10-Yr Tenor in Q1 2019.

The DMO released the much anticipated Q1 FGN Bond offer circular during the month which showed it plans to raise between N360bn to N440bn in the first quarter of the year. At the Bond auction for January held on 30-Jan, the DMO offered 50bn each of the 5, 7 and 10-yr bonds. The auction was oversubscribed by c.131% due to the significant demand on the 10-year bond. The DMO consequently sold a total of N116bn with stop rates clearing at an average of 15.27%, c. 15bps below their previous auction levels.

Renewed Offshore Interests Spur C.75bps Decline In Ntb Yields

The Treasury bills market witnessed increased bullish sentiments over the course of the month, largely due to increased demand from FPIs who showed more preference for the relatively higher yields and shorter duration exposure in the Nigerian T-bills space. The Downtrend in yields were however concentrated on the shorter end of the curve, with the longer end of the curve closing on a relatively flat note due to the relatively higher yields on the longer tenured maturities offered at the CBN’s regular OMO auctions. 

The DMO released its Q1 NTB Calendar at the start of the month, indicating its intentions to rollover a total of c.N823bn of the N985.92bn NTB maturities in Dec 18 – Feb 19. In Jan 2019, the DMO sold a total of c.N481.47bn T-bills of the c.N644.27bn that matured at three separate auctions.  Stop rates at the auctions cleared at an average of  10.97%, 13.23% and 14.83% on the 91, 182 and 364-day tenors respectively, and were c.14bps above their levels in  Nov 18 when the last NTB Auction was held.

Fx Rates Strengthen Amid Renewed Fpi Inflows And Sustained Fx Interventions

On the back of the renewed FPI inflows in the I&E market (c.$1.32bn) which was c.187% higher than the inflows in the previous month, and the sustained FX interventions by the CBN, FX rates appreciated marginally in the I&E (0.38% to N363.03/$), BDC (0.22% to N358.00) and interbank segments (0.07% to N306.75/$). The Naira however depreciated by c.0.27% to N365/$ in the parallel market due to increased demand from unofficial sources. The CBN Maintained its regular wholesale and retail FX interventions in the interbank market, whilst injecting a total sum of $453m in the I&E market. It also maintained its $75,000 weekly sales to the 4,115 active BDC operators.  

Nigerian Eurobonds Rally Amid Softening Global Headwinds, Em Resurgence

The Nigerian Sovereign Eurobonds have rallied by c.108bps from an average of c.8.50% as at 31-Dec-18 to c.7.22% as at 31-Jan-19. The significant downtrend in yields came on the back of resurgent interests in EM assets due to the softening tone in the US-China trade dispute, the relative uptrend in oil prices and most especially the slightly more dovish stance by the US Fed, all off which posit a strong case for EM bonds which were significantly downbeat in the latter part of the previous year.

Yields on the Nigerian Corporate Eurobonds also declined by an average of c.107bps m/m, with the highest decline witnessed on the DIAMBK 19s which retraced further by c.500bps from the massive selloff earlier occasioned by its rating downgrade by S&P, Moody’s and Fitch. Investors showed the most interest for the Access 21s Snr, Zenith 22s and UBANL 22s amongst the banking names. The SEPLLN 23s also witnessed a significant rally on the back of its strong operational results and improved ratings outlook.

Market Outlook

Bullish Fixed Income Trend To Dampen Post Election

Having declined by c.20bps in the month of January, the bond market re-opened the new month on a significantly bullish note, with yields compressing further by another 20bps in the week to date. The aforementioned has been due to significant buying interests from offshores which have fueled some panic buys amongst local investors as well. The recent events reflect market expectations for a relatively peaceful conduct of the forthcoming elections given the current risk on stance. We however expect the bullish trend to dampen post-election, with yields expected to retrace slightly due to expected post-election policy lags which should weigh on investment interests in the medium term.

CBN to Maintain Regular Omo Auctions

Investors are expected to sustain demand for the higher yielding long tenor (>300day) OMO bills offered by the CBN, whilst the shorter end of the T-bills curve is expected to retrace slightly higher, with the CBN expected to further tighten system liquidity via its liquidity management activities in the money market. The CBN is expected to sustain its spate of OMO interventions, with c.N1.87trn OMO maturities expected in the month of February.

Fx Rates To Decline Marginally

 In view of the forthcoming elections and post-election events, we expect the naira to depreciate marginally especially at the parallel market, due to expected increase in demand for the greenback. We however expect the CBN to sustain the relative stability of the Naira via its continued FX interventions across all market segments.

Eurobonds to Sustain Gains

Having rallied significantly by c.100bps in the previous month, we expect the Nigerian Eurobonds to remain relatively stable in the month of February as investors interest remain relatively robust for Hard currency EM bonds due to the slightly more dovish stance by the US FED and positive comments from the US-China Trade Negotiations. Slower growth and increased volatility in advanced markets are also forcing portfolio managers to refocus attention on EM assets which were significantly downbeat in latter part of the previous year. The recent uptrend in oil prices given the sanctions by the US on Venezuela and OPEC+ cuts also bode well for the Nigerian Eurobonds in the near term.

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