March 2, 2021/Coronation Weekly

Recent auctions in the Nigerian Treasury Bill (T-bill) market have reached yields of 5.5% (for 1-year paper), trending upwards and trading much higher than yields in the secondary market (see sidebar). We think that T-bill yields can reach 10.0% per annum, if not higher, by mid-year. There is also a complex connection with rising US dollar bond yields.

FX

Last week the exchange rate in the Investors and Exporters Window (I&E Window) weakened by 0.17% to N410.48/US$1. In the parallel, or street, market the Naira depreciated by 0.42% to close last week at N482.00/US$1. With the two rates 17.4% apart we believe that the World Bank may continue to insist on the unification of Nigeria’s exchange rates, despite changes made during the past year. On the other hand, the most recent exchange rate adjustment to the I&E Window rate (in February) was by 7.0%. So, in our view, a few more such adjustments could easily close the gap between the NAFEX market and the I&E Window on the one hand, and the cash parallel market on the other, if the Central Bank of Nigeria (CBN) permits this.

Bonds & T-bills

Last week, the secondary market yield for an FGN Naira bond with 10 years to maturity declined by 2bps to 10.77% and at 7-years declined by 12bps to 10.33% while at 3-years the yield declined by 110bps to 6.84%, making the yield curve steeper (see page 2). What has happened is that long-dated FGN bonds have been selling off while maturities of 5-years and under are being bought. The annualized yield on a 335-day T-bill remained unchanged at 2.07% in the secondary market, while the yield on a 333-day open market operation (OMO) bill of the CBN declined by 64bps to 8.96%. At last week’s Primary Market Auction for T-bills, on the other hand, the stop rates closed higher by c.133bps on average across the three tenors, closing at 2.00%, 3.50%, and 5.50% for the 91-, 182-and 364-day offers respectively. Although there is noticeable rotation in the bond market from long-dated to short-dated maturities, we believe that the overall trend in rates is upwards and will remain so for at least several week.

Oil

The price of Brent crude rose by 1.36% last week, closing at US$66.13/bbl, a 27.66% increase year-to-date. The average price to year-to-date is US$58.80/bbl, 26.49% higher than the average of US$43.22/bblin 2020. The combination of accelerating vaccination drives, government stimuli, and continued supply discipline on the part of producers have lifted oil prices recently. It is noticeable that among OPEC+ members (OPEC plus Russia) compliance with scheduled production cuts reached 103% in January, higher than the 101% recorded in December. However, OPEC+ is meeting this week to discuss its agreement and expectations are that some members may push for moderate production increases. Press reports indicate that Saudi Arabia and Russia are once again at odds over production policies, especially in the light of the oil price rally so far this year and the return of US shale to international markets. We believe there is there exists potential for oil prices to moderate after this meeting

Equities

The Nigerian Stock Exchange All-Share Index (NSE-ASI) fell by 0.96% last week with a loss of 1.17% year-to-date. Oando (+12.38%), Guinness Nigeria (+4.54%), and Stanbic IBTC (+3.36%) closed positive last week, while Nigerian Breweries (-11.86%), Honeywell Flour Mills (-9.77%) and Lafarge Africa (-7.60%) closed negative. Despite the effect of rising market interest rate yields, there’s the likelihood of investors taking positions in dividend-paying stocks as companies like Zenith Bank and MTN Nigeria release their full-year 2020 corporate earnings. However, our overall sense is that interest in the market is weak.

Yields in the Nigerian Treasury Bill (T-bill) market are rising and last week we received several clues as to their future direction. In recent weeks trading has focused on the primary market auctions. Last week a T-bill with 364 days to maturity was sold at 5.5%: two weeks prior that it had sold at 4.0%. If we are correct in thinking that the primary auctions accurately reflect supply and demand (more so than the secondary market) then: a) it follows that investors are pushing rates up; and b) it suggests that the Debt Management Office (DMO) and the Central Bank of Nigeria (CBN) tolerate these developments.

The CBN issued open market operation (OMO) bills in February at just over 10.0% per annum (pa). These sales are only available to foreign investors and Nigerian banks. OMO bill yields, therefore, do not translate into the secondary market for T-bills where pension funds, insurance companies, mutual funds and others are active. However, as we argued on these pages two weeks ago, the CBN may be sending a signal to all the fixed income markets with its OMO rates.

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