March 14 (Lagos) - As postulated in our February Fixed Income monthly update (Healthy liquidity on the horizon), the much improved oil revenue picture alongside success of the $2.5 billion Euro-bond issuance, now reduces the scale of domestic issuance's over the near term. In sync with this view, the 2nd quarter Treasury Bills Calendar released yesterday showed a sizable decline in planned borrowings at the short end.
Coming from the first quarter, where the FG net-repaid N117 billion, the FG plans to net-repay N484 billion in the 2nd quarter calendar period. Specifically, the calendar indicates the FG will be net repaying N632.43 billion worth of 364-day paper while net issuing N1.1 billion and N149 billion worth of 91-day and 182-day paper.
In a replay of March 1st auction, where the CBN chopped off treasury bill stop rates (average marginal rates: -15bps to 12.95%) by its biggest magnitude this year, we see further scope for lower stop rates at subsequent NTB auction following enhancement in FG’s bargaining power.
Consequently, this is expected to send jitters in the secondary market with kneejerk buying across various short dated maturities on the back of an expected plunge in treasury bill stop rates at today’s NTB auction.
Buy in March and go missing.
With the success of the $2.5 billion external borrowings on deck and its increasing aversion towards Naira paper, FG will be better positioned to exert influence over marginal clearing rates at successive NTB auction.
As a result, analysts at ARM Securities Limited in Ikoyi foresee sizable haircut on marginal clearing rates at today’s auction with more to follow at subsequent auctions. More so, given FG’s resolve to rollover only N482 billion out of the N964billion maturing in Q2 18, the CBN is set to contend with liquidity surfeit in the system, especially on the apex bank’s balance sheet where maturing OMOs bills in Q2 18 amounts to N5.3 trillion.
Tying this to a benign inflation outlook for 2018 (YoY - February: 14.33%; ARM 12-month average: 12.8%) driven by base effects, we think the CBN will be persuaded to take further cuts on marginal clearing rates for OMO sales.
In view of the above, we suggest a buy now and go away strategy in tackling the recent qualm in the fixed income market. Given FG’s increasing sensitivity towards rising cost of borrowings, we foresee further plunge in treasury bill yields over H1 18, with slight retrace over H2 18 where we see capital flights ahead of 2019 general elections providing scope for the CBN to keep yields environment attractive.
Irrespective, we see the yield curve trending below current levels in H2 18. Based on the foregoing, we recommend a “buy now” at current treasury bill rates and “go away” in H2 18.