Fixed Income Monthly Update: February 2018 – Healthy liquidity on the horizon

Fixed Income Market Close The Week With Improved Demand 
  • FG delivers on its promise to raise $3 billion Eurobond for refinancing maturing treasury bills. Last month, for the second time in barely three months, Nigeria closed out on its 5th Eurobond issuance raising $2.5 billion to refinance maturing treasury bills. The issuance was split into 12-year and 20-year series of $1.25 billion apiece with coupons of 7.14% and 7.69% respectively.
  • CBN soft pedal on liquidity mop up. After two consecutive months of aggressive liquidity mop-ups, which saw OMO sales touch its highest level in January (N2 trillion), the apex bank slowed down the pace of its sterilization in February with net OMO sales of N129 billion. Particularly, the CBN refrained from mopping up excess liquidity for one week which cascaded into liquidity surfeit in the system.
  • Investors demand higher return for taking on FGN bonds. Similar to a rising trend in January, marginal rates at the February bond auction were higher for both 2021 and debut 2028 bond at 13.7% and 13.98% respectively. The higher rates mirrored lower subscription levels (-22% MoM to N118 billion) and rising secondary market yields following a mild sell-off by offshore and local investors at the start of the month.
  • Treasury bills yields track higher. After rising in January on account of aggressive CBN liquidity mop-ups, average treasury bills yield climbed further in February (up 68bps to average 15.16%) driven by a liquidity strain in the early part of the month and reduced offshore activity. For context in Mid-February average Treasury bills yields rose to a 2018 high of 15.57%. However, Treasury bill yields retreated temporarily to 14.65% after CBN failed to mop up excess liquidity in the succeeding week.
  • Going forward, if recent trends in the fixed income market are anything to go by, then it is clear that the body language of the fiscal and monetary authorities is one that suggests further plunge in yields in the near term. Particularly on the fiscal side, the much-improved oil revenue picture alongside success on its external financing plan reduces the scale of fiscal paper issuance over the near term. Meanwhile on the monetary side, considering the quantum of liquidity set to hit the system from refinancing of maturing treasury bills (N763 billion), OMO maturities (N11.9 trillion), Bond (N300 billion) and NTB maturities (N2.73 trillion), CBN is set to grapple with excess monies in the system.

ARM Securities Limited