In recent times, the Nigerian fixed-income market has seen a sharp decline in yields, raising concerns among market participants about the possibility of a correction or retracement in the near term. Many analysts argue that the recent downward movement has been too sharp, suggesting that the market could soon see some stabilization or reversal. However, with the next Monetary Policy Committee (MPC) meeting scheduled for May, there is a significant gap in policy guidance; the market will mainly be influenced by the liquidity, inflation released by the NBS, and the supply of securities by the Debt Management Office (DMO).
The February bond auction conducted by the DMO has once again underscored the Federal Government’s borrowing strategy and its potential impact on the fixed-income market. With an initial offer size of ₦350 billion (₦100 billion short of the previous auction), there were early signals that the DMO could be adopting a more measured approach to borrowing. However, by the close of the auction, the DMO had significantly overshot its target, raising nearly ₦1 trillion. This substantial oversubscription suggests that investor demand remains strong despite prevailing concerns about rate direction and market volatility.
In the week under review, the Naira fluctuated between a high of $/₦1,505.00 on Tuesday and a low of $/₦1,490.00 on Friday, closing at $/₦1,500.00 on Friday. The money market sustained a liquidity surplus of over ₦130 billion after several weeks of deficits, and in line with this, short-term borrowing rates saw a notable decline, with the O/N rate falling to 27.33% and OPR to 26.75%, down from the previous week’s 32.83% and down from 32.33%, respectively.
One of the most critical factors that will shape market direction in the coming months is the borrowing appetite of the DMO. Historically, the DMO has shown a tendency to oversupply bonds, and given the current fiscal realities, there is little indication that this trend will change. The question remains whether a more cautious stance will be adopted or if aggressive issuance will continue, which could further pressure yields. While we may not see bond yields reach the 22% threshold in the immediate term, a return to the 20% range appears more likely as market dynamics adjust.
The 18.50% level appears to be a strong resistance point, particularly as it aligns with the issuance level of the 2031 bond. Where demand for FGN bonds strengthens, following the maturity of March 2025s and coupon payments, yields could decline further, breaking the 18.50% threshold seen in the secondary market.
The role of the Central Bank of Nigeria (CBN) in managing market sentiment cannot be overlooked. There is a growing consensus that the CBN Governor will need to adopt a more conservative approach to policy decisions, especially given the rapid fluctuations seen in recent weeks. Despite the prevailing optimism among market participants, the decline of 400 basis points in just three weeks has been viewed by many as excessive. This sharp drop has fueled expectations that a correction is imminent, though the extent and timing remain uncertain.
Ultimately, the market remains at a critical crossroad. The interplay between investor sentiment, policy direction, and the DMO’s borrowing strategy will determine whether the current downturn extends further or if a stabilization phase is on the horizon. While near term volatility is expected, the broader trend will likely be shaped by key policy decisions and external economic factors in the months ahead.
Unlike the last auction which saw an increase in stop rates, this auction witnessed a pronounced decline in stop rates. The 5-year and 7-year bonds saw decreases of 259 basis points and 317 basis points, respectively, to close at 19.2000% and 19.3300%, respectively. Market observers believe this performance signals a more cautious stance from the DMO, possibly reflecting a commitment to fiscal prudence amid ongoing economic challenges.
Given the DMO’s borrowing pattern and the current yield environment, secondary market activity is likely to remain volatile in the near term. With stop rates not rising as aggressively as before, some investors could reassess their positions, leading to increased trading activity as portfolios are rebalanced.
BONDS TENOR | APRIL 2029 | FEBRUARY 2031 |
AUCTION DATE | 24-02-2025 | 24-02-2025 |
SETTLEMENT DATE | 26-02-2025 | 26-02-2025 |
MATURITY DATE | 17-04-2029 | 21-02-2031 |
TENORS | 5-YEAR | 7-YEAR |
AMOUNT OFFERED (₦) | 200 BILLION | 150 BILLION |
SUBSCRIPTION (₦) | 465.146 BILLION | 1,167.092 BILLION |
AMOUNT ALLOTTED (₦) | 305.362 BILLION | 605.027 BILLION |
STOP RATES (%) | 19.2000 | 19.3300 |
PREVIOUS STOP RATES (%) | 21.7900 | 22.5000 |
Liquidity conditions will also play a significant role in determining market direction. The oversubscription at the auction indicates that there was significant demand, but whether this translates into sustained buying interest in the secondary market remains a mystery. Where yields stabilize or retrace slightly, we may see a shift in sentiment, with more investors willing to re-enter the market.
In the broader fixed-income space, the interplay between government borrowing, investor sentiment, and liquidity conditions will dictate the trajectory of yields. While the immediate outlook suggests some level of consolidation, the potential for another sharp move—either upward or downward—remains high. Investors will need to remain nimble, carefully assessing both primary market dynamics and evolving macroeconomic signals to navigate the uncertainties ahead.
The latest Gross Domestic Product (GDP) figure shows Nigeria’s economy expanding at its fastest pace in three years, providing an interesting backdrop for the fixed-income and secondary markets. A 3.84% year-on-year growth in the fourth quarter of 2024, up from 3.46% in the previous quarter, is a significant improvement and signals that the economy is gaining momentum. Annual GDP growth reaching 3.4% in 2024, compared to 2.7% in 2023, suggests a steady recovery. However, while this economic expansion is encouraging from a macroeconomic perspective, its implications for the fixed-income market require meticulous analysis.
A growing economy often leads to shifts in monetary policy, government borrowing, and investor sentiment. Where the CBN views the economic expansion as a sign of rising demand and potential inflation risks, it might adopt a more hawkish stance, tightening liquidity and pushing yields higher in the fixed-income market. We expect that investors will closely monitor the CBN’s response in the coming months.
While a strong economy could improve investor confidence and reduce risk perceptions in the secondary bond market, the government’s borrowing appetite remains a critical factor. At the recent bond auction, the DMO sold nearly ₦1 trillion—far exceeding its initial target—which is indicative that the government still has substantial financing needs. This could keep supply pressure on the bond market, which, depending on demand dynamics, may influence yields. If investors expect continued heavy borrowing, bond prices could remain under pressure, and yields could stay elevated. However, where fiscal discipline is maintained, and borrowing is moderated in response to improved revenue performance, there could be some stabilization in the fixed-income space.
Further, there is a possibility that expectations around policy direction and liquidity conditions will largely dictate trading activity. The expansions in the services sector, coupled with government initiatives aimed at improving food security and supporting economic inclusion, may contribute to a more positive investment climate. If these efforts translate into stronger revenue generation and improved fiscal stability, it could provide some relief by reducing the need for aggressive borrowing.
As the month of March begins, liquidity expectations are shaped by anticipated coupon payments on several bonds with a maturity of over ₦560 billion for the March 2025 bond alone. The market is set to receive inflows from two March 2027 bonds, one March 2035 bond, one March 2036 bond, and the March 2050 bond. These coupon payments will inject liquidity into the system, potentially influencing trading activity in the secondary market and overall yield movements. In total, expected inflows into the market for the month are a little over ₦4 trillion. It is logical to expect OMO issuances by the CBN and this may or may not spark a correctional retracement in yields albeit minor. We expect the 18.50% threshold to remain a strong resistance point on bonds and are interested to see where CBN issues OMOs in the coming weeks.
Cryptocurrencies are likely to benefit from the bandwagon effect given the recent boost to Bitcoin and Ethereum by the Trump administration. It will come as no surprise if Bitcoin exceeds the $100,000 mark in the coming weeks to set a new all-time high. Oil prices are expected to remain volatile as uncertainty looms about conflict resolution in the Middle East and between Russia and Ukraine.
