Monetary, Fiscal policy combine to push T- Bill yields to 2-year low


December 13, 2017 | 2:34 am
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The plan to redeem all Nigeria Treasury bills (NTBs) maturing this month and a halt in Open Market Operation (OMO) bill issuances by the central bank are combining to send yields to their lowest since 2015.
Yields on Treasury bills dropped by more than half to around 7 percent across board after the Debt Management Office said Tuesday that it would redeem some N198 billion (USD$647 million) in maturing T/bills for the month of December.
That’s a 61 percent decline from one year T-Bill yields as high as 18 percent barely a day before.
The NTBs will be redeemed primarily using proceeds of the USD500 million Eurobond raised in November 2017, according to the DMO.
Nigeria had issued a dual-tranche USD3 billion Eurobond in November 2017 out of which USD2.5 billion is to part-finance the deficit in the 2017 Appropriation Act and the balance of USD500 million is for the refinancing of domestic debt.
There were early forecasts for a slump in interest rates in line with the refinancing plan which was targeted at freeing up space in the bond market for corporates, as the government tries to rebalance its debt mix, manage ballooning domestic interest payments and fix its inverted yield curve.
“The moderation in yields imply lower funding cost for corporates that plan to raise debt capital or issue commercial paper (CP) to buffer liquidity positions,” said Tajudeen Ibrahim and Aderonke Akinsola of Lagos-based investment bank, Chapel Hill Denham in an October 6 note to clients.
As a result, more corporates will likely be encouraged to approach the debt capital market, with FMCG, Industrials and Real Estate companies as likely front runners, they said.
“Nigerian Breweries Plc (NB), Dufil Prima Foods Plc (Dufil), UACN Property Development Company Plc (UPDC) and Flour Mills of Nigeria Plc (FMN) are some of the companies most likely to consider CP issuance to leverage the low yields in the market,” said the duo of Ibrahim and Akinsola.
Based on data from the FMDQ, no non-financial corporate that has a Commercial Paper (CP) programme has returned to the debt market for CPs since the maturity of such in the second and third quarters of 2017.
NB and FMN have a N100 billion CP programme each (NB’s last tranche matured on 23 August), while Dufil and UPDC have N30 billion (last tranche matured on 22 August) and N24 billion CP (last tranche matured on 14 September) programmes respectively.
The management of FMN however recently disclosed plans to issue CPs to support working capital.
Before now, elevated yields on government treasury bills as high as 18 percent had squashed any appetite for corporates looking to raise short and long term debt. It also led to a crowding out effect for the private sector.
Such high yields proved difficult to resist for the commercial banks that had soon piled cash into high returning T/bills and were uninterested in growing their loan books.
The situation starved the real sector of affordable funds and spooked corporates in need of debt capital as they feared it would be too expensive.
This is the one anomaly the government is now set to adjust, as Africa’s largest economy gradually cranks back to life after suffering its first economic recession in 25 years last year.
“By redeeming the N198.032 billion NTBs, the Government is not only implementing its debt management strategy, but also providing liquidity to the financial system to enable the private sector access credit from banks and issue securities in the domestic market to raise funds,” the DMO said on its website Tuesday.
The DMO expects operators in the market to use this opportunity to develop the other segments of the debt capital market such as Corporate Bonds.
The crash in yields is a breather for cash-strapped companies as it would help reduce their cost of funds, according to Ayo Akinwunmi, head of research at FSDH Merchant bank.
“Companies will have better capacity to fund long term projects and employ more people,” Akinwunmi said by phone.
On the sustainability of low yields, Akinwunmi said it will depend on if the government can meet its revenue target and tame the budget deficit.
“If they can’t achieve the revenue target, there will be a gap that is likely to be funded by borrowing, although they will probably play more on the long end of the curve by raising more long term debt rather than short term debt.
“That said, we expect an increase in corporate debt issuance next year as companies rush to take advantage of the low yields to raise debt capital,” Akinwunmi added.
The fiscal side shouldn’t take all the plaudits for lower yields, with the CBN’s halt in OMO auctions also deserving credit.
The central bank has kept liquidity tight in Nigeria to support the naira by attracting foreign inflows into its bond market to boost dollar liquidity in the wake of a currency crisis in Africa’s biggest economy.
However, in a departure from its daily practice over much of 2017, the apex bank did not undertake any Open Market Operation (OMO) last week.
The development spooked fixed income markets as investors rushed to cover short positions with significant buying across the yield curve, which resulted in average declines of 190 basis points and 60 basis points in Nigerian Treasury Bills (NTBs) and FGN bond yields respectively during the week.
“In the near term, we believe that the decision to cease OMO auctions is likely to cascade into a flattening of the NGN yield curve as rising liquidity levels drive a compression in short term interest rates,” Wale Okunrinboye, a fixed income analyst at Ecobank Research said in a December 12 note to clients.
“For longer dated bonds, in the light of increasingly dovish forward guidance by the CBN and prospects for reduced NGN borrowings by the FGN, we believe increased duration buying by pension funds is likely to drive real yields further into negative territory in the near term,” Okunrinboye noted.
The CBN’s growing comfort over the naira performance on account of rising FX reserves is the key driver of the changing stance in money markets.
Reserves hit a 24 month high of $36.4 billion as of 11th December, 2017.




December 13, 2017 | 2:34 am
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