Steering Nigeria’s fixed-income terrain in these volatile times requires a deep understanding of inter-connected macroeconomic and fiscal developments. Recent revisions in inflation data, fluctuations in the Naira’s performance, NTBs auction results, OMO auction trend and the amendments to the Presidential Tax Reform Bill have all contributed to an evolving market environment. For investors focused on fixed-income securities, these factors represent prospects and a complex blend of considerations that complicate sound decision-making.
The recent amendments to the Presidential Tax Reform Bill have appeared as a critical piece of the fiscal policy puzzle. The government’s efforts to improve Nigeria’s tax system aim to address longstanding revenue inefficiencies while adopting a more transparent and accountable budgetary environment. Key changes include refining the tax base, enhancing compliance measures, and, most importantly, retaining the current VAT rate of 7.5% instead of pursuing a steep increase. These measures are expected to improve government revenue generation and reduce the deficit.
The Naira in the last few weeks has been unpredictable, with notable periods of appreciation that have helped boost market confidence, coupled with declines that highlight ongoing vulnerabilities, which shall be discussed further in this newsletter. Last week, the Naira fluctuated between a high of $/₦1,560.00 on Thursday and a low of $/₦1,480.00 on Friday, and closed at $/₦1,548.00 on Friday. The money market sustained a liquidity deficit of over ₦950 billion. In line with this, short-term borrowing rates saw a slight uptick, with the O/N rate rising to 32.80% and OPR to 32.40%, up from the previous week’s 27.67% and 27.08%, respectively.
Based on a preliminary assessment of the updated NTB calendar issued for the quarter, it is clear that the DMO will be conducting NTB auctions almost every week in March. Comparing the last two auction results, we observe key differences in offers, allotments, and stop rates, which have had far-reaching implications for the fixed-income market, with particular regard to secondary market interpretation.
The March 5th auction had a total offer size of ₦650 billion, while the March 12th auction reduced the total offer to ₦550 billion, with a significant cut in the 364-day bill offer from ₦500 billion to ₦400 billion. The reduction at the time suggested a possible adjustment in borrowing needs or an attempt to manage liquidity more cautiously.
The 91-day and 182-day bills were undersubscribed at both auctions, with allotments significantly lower than their offers. A trend suggestive of investors’ lack of interest in short-term instruments, likely preferring longer tenors that provide better yield compensation for inflation risks. The 364-day bill, however, remained the most in demand, though its dynamics changed between auctions.
The 91-day stop rate remained constant at 17.00% while the 182-day bill saw a slight increase by 4 basis points, from 17.75% to 17.79%, showing a marginal adjustment in investors’ risk appetite. However, the rate of the 364-day bill jumped by 57 basis points, from 17.82% to 18.39%, indicating that investors demanded higher compensation.
The increase in stop rates, especially for the 364-day bill, was a confirmation that previously issued bills with lower yields would trade at a discount. Some schools of thought have equally posited that this new development could lead to an increase in yields in the coming weeks. The market consensus at the moment is that there will inevitably be a retracement exceeding the 20% threshold.
AUCTION DATE | 12-03-2025 | 12-03-2025 | -03-2025 |
ALLOTMENT DATE | 13-03-2025 | 13-03-2025 | 13-03-2025 |
MATURITY DATE | 12-06-2025 | 11-09-2025 | 12-03-2026 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 70,000,000,000 | 80,000,000,000 | 400,000,000,000 |
SUBSCRIPTION (₦) | 35,171,536,000 | 39,367,588,000 | 1,192,469,313,000 |
ALLOTMENT (₦) | 34,721,536,000 | 36,233,588,000 | 607,803,211,000 |
STOP RATES (%) | 17.0000 | 17.7900 | 18.3900 |
PREVIOUS STOP RATES (%) | 17.0000 | 17.7500 | 17.8200 |
Following the rebasing of the Consumer Price Index (CPI) by the National Bureau of Statistics (NBS), inflation went from 34.80% in December 2024 to 24.48% in January 2025. However, while the headline figure appears to signal a significant easing in price pressures, the underlying core inflation remains stubbornly high. This discrepancy presents fixed-income investors with a mixed signal; on the one hand, the statistical adjustment provides room to hope for reduced inflationary pressures and a more favourable yield environment; on the other hand, the persistence of core inflation forces investors to recalibrate their real yield expectations as they try to reconcile the short-term improvements with longer-term structural challenges.
The inflation figure for February 2025, expected to be released this week, is likely to stabilize or present a moderate increase following the sharp drop in January, which was primarily driven by the rebasing of the CPI. Considering that this statistical adjustment has already been factored in, the February figure will be more reflective of underlying price pressures. Core inflation remains elevated, indicative of the fact that perhaps the structural price drivers had not eased significantly.
Further to the CBN’s decision to maintain the Monetary Policy Rate at 27.50%, we infer that the policymakers remain cautious about inflationary risks, which could mean that a further drastic decline is unlikely. Instead, inflation may hover around 24%–26%, with the possibility of a slight uptick where core inflation pressures persist. However, a further decline could occur when food prices ease and the effects of the rebasing persist. A major risk to this outlook would be any renewed supply chain disruptions, FX volatility, or fiscal pressures, which could push inflation higher.
Parallel to these developments, the performance of the Naira has painted a picture of both promise and uncertainty. The recent appreciations recorded with the Naira, supported by improved FX inflows and policy measures, have helped stabilize the Naira. This period of commendable Naira appreciation has been accompanied by efforts from the CBN to improve market transparency and liquidity. Improved liquidity in the FX market supports the overall stability of the financial system, which is positive for fixed-income markets. Investors are more likely to engage with sovereign and corporate bonds when they see a proactive approach to currency management.
Recent amendments to the Presidential Tax Reform Bill represent a considerable turn in Nigeria’s fiscal policy framework amid these monetary and debt market developments. The reforms are designed to transform an archaic tax system, enhance revenue collection, and reduce leakage—all of which have important implications for the country’s fiscal stability and debt servicing capacity.
The government’s overall revenue position may strengthen with efforts to curb revenue leakage and enhance tax collection efficiency. The amendments, which include tightening the process for tax waivers (requiring legislative approval) and ensuring that VAT revenue is more accurately allocated and based on actual consumption, indicate a commitment to transparency and accountability. These measures can increase confidence in the government’s fiscal management, which is a positive signal for fixed-income investors and may contribute to a more favourable yield environment on government bonds.
By refining the tax base and introducing more stringent compliance metrics, such as retaining the current VAT rate of 7.5% instead of a drastic increase, the government seeks to create a more predictable fiscal outlook. Despite the technical merits of the reforms, contentious issues (such as debates over VAT revenue distribution and limits on executive tax waivers) appear to plague its implementation. These bottlenecks may lead to short-term volatility in fixed-income markets until the new system is fully institutionalized and its impact on fiscal performance is demonstrated.
The near future presents a complex and evolving direction that will be determined by monetary policy decisions, inflation dynamics, fiscal adjustments, and the foreign exchange market. The current environment is one where the CBN has opted to maintain a tight monetary stance, keeping the MPR at 27.50%, at least till the next MPC meeting, despite the recent rebasing of inflation figures that saw a sharp drop from 34.80% in December 2024 to 24.48% in January 2025.
With liquidity injections likely to be set-off by OMO withdrawals, liquidity conditions could remain tight for the foreseeable future and short-term borrowing rates high, reflecting liquidity constraints. Yields are expected to trend upward in the short term, particularly where liquidity conditions remain tight. The upward movement in stop rates at the recent NTBs auction supports this expectation, and there are indications that yields on government securities could approach or even exceed 20% where market conditions remain unchanged. Traders in fixed-income can take advantage of these dynamics by positioning themselves strategically.
It is our opinion that the sudden drop in yields may have been excessive and the market is now due for a correction. How extreme this correction may be will depend to a large extent on revelations in the days ahead as markets are currently sensitively responsive. Overall, a proactive and adaptive trading strategy is crucial to success at the moment.
Globally, oil prices may inch up this week as tensions between Russia and Ukraine are far from over and the Middle East still appears to be prone to escalation. We expect cryptocurrencies to inch higher this week, although with increased downward pressure. Extreme volatility is certain in both oil and cryptocurrency markets.
