UPDATED: CBN keeps bond traders guessing on rate direction

…as OMO auctions blunt FG’s cut back on borrowing

… Nigeria retires N130 billion of treasury bills

Bond traders are having a hard time guessing if improving inflationary conditions, a somewhat stable naira exchange rate and the government’s reduced appetite for domestic borrowing are enough to drive yields south.  A wrong bet on the direction of yields in the next few months could cost them billions.

Pension Funds Administrators (PFAs) would be keeping an eye on the direction of bond yields, given they hold the single largest share of federal government bonds.

The PFAs’ holdings come to 55.7 percent of their N6.5 trillion total assets. That gives a value of N3.7 trillion, according to data available on the website of regulator, Pension Commission.

Central Bank’s renewed open market operation (OMO) auctions have emerged as a surprise upside risk to forecasts for lower yields this year, creating confusion among bond traders.

The CBN halted OMO auctions last December after the Debt Management Office (DMO) repaid N198.032 billion worth of Treasury bills, a departure from the usual practice of rolling them over.

Both factors sent yields to their lowest in two years, fanning sentiments of a lower yield environment in the short to medium term.

It was more of the same, Friday, when Nigeria paid off about N130 billion ($413 million) worth of treasury bills maturing this week, instead of rolling them over, as the federal government tries to offset ballooning domestic debt service costs with proceeds from the sale of a $2.5 billion Eurobond last month.

In confirmation of deliberate attempts to lower borrowing costs, the DMO sold N129.99 billion worth of treasury bills at an auction last week Wednesday, around half the amount it advertised in its calendar at the lower-range of the yield curve.

Investors demanded as high as 20 percent for the one-year bill which fetched 13.5 percent at the auction. This is down from an average of 22.5 percent in most parts of 2017. The DMO sold the three-month bill at the lower-end of the curve at 11.85 percent.

However, the resumption in OMO auctions look set to rein in the parade of lower yields this year which was expected to happen on the back of government’s waning appetite for domestic debt.

The CBN mopped some N2.2 trillion in January 2018, tossing the better part of bond traders’ low yield expectations out the window.

“That has left the bond market searching for clues on the direction of interest rates,” Wale Okunrinboye, a fixed income analyst at Ecobank Group told BusinessDay.

Okunrinboye joins a host of bond traders and analysts wondering if the CBN’s OMO issuances can make up for a shortfall in government Treasury bill issuances, which would then narrow the scope for lower yields.

Decelerating inflation and exchange rate stability make a compelling case for the CBN to reduce OMO auctions- which the apex bank frequently used to defend the naira exchange rate and tame rising inflation in thick of an economic crisis in 2016.

The OMO auctions ensured there was not too much naira chasing scarce dollars at a time when low oil prices and production as well as a slide in foreign investment had taken its toll on dollar liquidity and forced a near 40 percent naira devaluation.

Petrodollars are flowing again with the rise in global oil prices and domestic production as well as improved foreign investments which have been lifted in no small way by the creation of a market-determined foreign exchange window (called Nafex) in April 2017, yet the CBN has another reason to continue its OMO auctions.

That reason is the need to create a floor for interest rates to ensure they do not become too low and less attractive for portfolio investors.

Portfolio inflows accounted for 60 percent of total dollar flows in 2017, indicating its significance to the economy.

Propelled by a 304 percent surge in portfolio inflows to $7.3 billion compared to the previous year ($1.8 billion), total capital imported into Nigeria more than doubled to a 3-year high of $12.2 billion last year from $5.1 billion in 2016, data agency, the National Bureau of Statistics said Thursday.

“The CBN is very mindful of foreign portfolio inflows and if they halt OMO issuances today rates could collapse to single digits and that may trigger some outflows,” a bond trader told BusinessDay. But this could also lead to instability in the exchange rate, a situation that the CBN would want to avoid.

Treasury bill yields fell as low as 7 percent last year from a high in excess of 18 percent. Longer tenure Bond yields fell by a lesser extent to 13 percent.

Yields are however on their way back up.

Six-month treasury bills gained 0.13 percentage points to 15.47 percent Friday, February 3, while the benchmark ten-year government bond was flat at 13.40 percent, according to data provided by trading platform, FMDQ.

The total turnover for Treasury bills and bonds came to $15.77 billion in the month of January 2018, implying a daily average trading of $829.9 million or N302.5 billion, according to FMDQ data.

 

LOLADE AKINMURELE