Change in CBN T-bill issuance profile: what gives?
Category: Money Market
June 6, 2012/ARM Research
The maturity structure of the CBN’s T-bill issuance programme underwent a fairly dramatic turn-around in May, with the apex bank suddenly opting to issue the bulk of its paper in short term (<91day) bills (see Figure 1). This very issue formed the subject of a recent commentary (See “Little Reprieve as T-bill Issuance Escalates” April 18th 2012) where we expressed some consternation about the CBN’s strategy of issuing longer term bills into 2013 in view of emerging liquidity chokepoints in debt markets in general over this horizon. Whether May’s trend represents a wholesale strategy change or was perhaps spurred by specific exigencies during that month, it is perhaps too early to conclude, but the shift nevertheless elicits important considerations.
As discussed in several recent commentaries on the issue, we perceive two primary policy constraints in the CBN’s use of OMO in liquidity management: finding appropriate maturity profiles for the paper and managing costs. These two are by no means unrelated, prevailing high interest rates adding, as they do, to the liquidity burden of future issuances. In our view therefore, any shift in strategy will reflect either (or both) of these issues. However, with the already significant bond and T-bill maturities set to rise progressively in coming years, it is not clear to us that the apex bank can make much of an impact on the problem by varying maturity profiles other than to resign itself to higher levels of systemic liquidity. Its strategy around cost is probably much more important and has been a source of mild perplexity in our view.
Figure 1: T-Bills Issuance breakdown by proportion
Signal moderation in yields?
In our view, there are two cost related issues that may have accounted for the switch in May. A deterioration of global outlook and the consequent exit of foreign investors—high domestic rates notwithstanding—will have had some impact on demand on longer dated T-bills; their preferred habitat. In this regard, we have consistently questioned the rationale behind basing attempts to attract foreign investment on high yields, ignoring the domestic economic cost. We posited risk aversion as the dominant impulse among foreign investors in Nigeria ’s market which any incremental expansion in yield spreads will be unlikely to ameliorate; a position apparently validated by market events in Q3 2011 and in May 2012.
Relatedly, a change in T-bill issuance profile in favour of the much shorter dated maturities may also indicate a revision in expectation about yields going forward, signaling moderation. In this scenario, the CBN may have chosen not to lock itself into yields at this level, in anticipation of a decline in yields possibly driven by a prospective reduction of MPR rates at the next meeting; as we conjecture in our recent review of the MPC meeting. The new issuance strategy (if indeed it is) may thus reflect a softening of the CBN’s commitment to positive real rates given the heighted burden of such an approach, the characteristics of whose target audience (foreign investors) probably renders counterproductive as discussed earlier.
There are other indications to the CBN’s increasing cost sensitivity in the T-bill market: It introduced a single bid auction system for its Open Market Operations (OMO) on May 25th, to curtail speculative bidding and canceled the auction for 2 maturities just immediately after the MPC meeting on account of “exorbitant rates”. This single bid system compels each Money Market Dealer (MMD) places one bid at the auction on behalf of all its clients as opposed to the retail bid system where multiple bids are placed on behalf of clients—more on this later. Also, net of maturities, T-Bill issuance in May is the lowest thus far in 2012.
Figure 2: Gross and net T-bills issuance volumes (N’million)
In all, these events buttress our view that yields will likely head southwards as the year wears on despite the recent pick up occasioned by a sell-off largely ascribed to foreign investors. The introduction of single bids is significant in this regard in that it will likely direct activity into the secondary markets, likely placing new constraints on volumes the CBN can issue in that window but also probably leading to more moderate pricing.
Figure 3: Primary market yields
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