Q1’18 Bond Issuance Calendar Signifies A Shift In Gaze

Q1’18 Bond Issuance Calendar Signifies A Shift In Gaze

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The release of the much-awaited Q1’18 bond calendar shows that the Federal Government (FG) would persist in its efforts to shift borrowing from domestic sources to external sources. The Debt Management Office (DMO) seeks to raise between ₦325 billion and ₦375 billion in Q1’18 – with ₦110 billion offered in January alone, a significant drop from the ₦535 billion raised in Q1’17 and a quarterly average of ₦380 billion last year.

This move does not surprise us as the FG is looking to lower interest costs in the domestic bond market and exploit relatively lower interest rates abroad. The 2018 budget estimates domestic borrowing for the year at c.₦850 billion, nearly half of the total raised in FGN bonds and sukuk last year (₦1620 billion). We expect the reduction in bond supply to moderate yields in the fixed income market going forward.

Nigerian Bourse extends bull run                                                           

The Nigerian stock exchange continued to post strong gains – NSE ASI up 189bps – following a surge in the Industrials sector. Market sentiment remains positive, evidenced by strong demand on blue-chip stocks and consistently widely positive market breadth. We foresee a similar trading pattern in today’s session.

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Stock Watch: Riding on the banking sector wave, SKYEBANK has enjoyed a good start to 2018, rising from par value of ₦0.50 to an 18-month high of ₦1.08. SKYEBANK remains under review within our coverage as the bank last released financial statements for Q3’15.

PMA, Q1’18 bond calendar point towards lower rates                                                   

The Central Bank of Nigeria conducted a Primary Market Auction yesterday, offering and selling ₦229.85 billion across the 91DTM, 182 DTM and 364DTM bills at respective stop rates of 12.10%, 13.75% and 13.79% (effective yields: 12.48%, 14.76% & 15.99%) – lower than stop rates of 12.55%, 13.93% and 14.30% at the prior PMA. Notably, demand was concentrated on the 364DTM bill with ₦193 billion sold on this instrument alone.

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The secondary market failed to take a cue from yesterday’s PMA with yields on T-bills advancing 4bps on average. The bond market traded mixed with a slightly negative tilt as yields on benchmark bonds were flat on average. We foresee yesterday’s PMA guiding trading in T-bills today as yields converge towards auction levels. Meanwhile, the DMO released the Q1’18 bond calendar, showing it plans to offer between ₦315 billion and ₦385 billion during the period. We expect the anticipated reduction in bond supply (Q1’17: ₦535 billion, 2017 quarterly average: ₦380 billion) to spur further buying in the bond space. In particular, we note that the DMO will not be reopening the 20-year bond and we see this move driving yield moderation at the long end of the curve.

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