Despite coupon payments (in excess of ₦300 billion last week), fixed income yields inched up as liquidity remained tight throughout the week.
The replacement of 2031s on the bond issuance calendar with 2033s was construed by some to indicate an accommodative stance towards higher than secondary market yields. The impact of this shift was a drive to sell-off bond holdings in anticipation of the re-introduced 19.89% 2033 bond.
Last week, the Naira fluctuated between a high of $/₦1,552.00 on Monday and a low of $/₦1,500.00 on Wednesday, closing at $/₦1,538.00 on Friday. The money market sustained a liquidity deficit of almost ₦2 trillion. In line with this, short-term borrowing rates saw a slight uptick, with the O/N rate rising to 32.90% from the previous week’s 32.80% while the OPR was maintained at 32.40%.
Coupon payments were credited in the week under review (₦84.29 billion, ₦57.42 billion, and ₦124.81 billion for the March 17th, 2027; March 18th, 2036; and March 20th, 2027 maturities respectively).
Irrespective of these injections, the system liquidity was still in a deficit, largely due to OMO issuance by the CBN to counter liquidity injections. The increased frequency of T-Bill auctions may also have skewed appetite towards bonds and towards a bearish bias.
At the end of the T-Bills auction last Wednesday (the third in March), the 91-day tenor had an offer of ₦100 billion, but its subscription was significantly low at ₦28.44 billion, resulting in an allotment of ₦27.19 billion. The 182-day tenor followed a similar trend, with an offer of ₦200 billion, but a lower subscription of ₦42.18 billion, leading to an allotment of ₦40.02 billion. Meanwhile, the 364-day tenor saw much higher demand, with a subscription of ₦831.42 billion against an offer of ₦500 billion. However, only ₦436.71 billion was allotted, indicating that the government was either selective in accepting bids on the 364-day tenor or that the government aimed to control borrowing costs. The low subscriptions observed at the auction reflect tight market liquidity.
The 91-day bill stood at 18.00%, the 182-day at 18.50%, and the 364-day at 19.94%. The upward trend in stop rates aligned with market expectations, as market liquidity remained tight during the week. The high demand for the 364-day bill may have enabled the government to keep the stop rates below the upper bid range of 23.50%. Conversely, the lower stop rates for the shorter tenors indicate that investors were not aggressively bidding, as evinced by the low subscription levels.
Looking at the broader trend, the latest auction results indicate a shift in market dynamics. Comparing the auctions held in previous weeks and that held last week, stop rates rose across all tenors, reflecting changing investor sentiment and tighter liquidity conditions. The 91-day stop rate rose from 17.00% to 18.00% (+100 basis points), the 182-day stop rate rose from 17.79% to 18.50% (+71 basis points), while the 364-day bill saw the sharpest increase from 18.39% to 19.94% (+155 basis points).
AUCTION DATE | 19-03-2025 | 19-03-2025 | 19-03-2025 |
ALLOTMENT DATE | 20-03-2025 | 20-03-2025 | 20-03-2025 |
MATURITY DATE | 19-06-2025 | 18-09-2025 | 19-03-2026 |
TENOR | 91-DAY | 182-DAY | 364-DAY |
OFFER (₦) | 100,000,000,000 | 200,000,000,000 | 500,000,000,000 |
SUBSCRIPTION (₦) | 28,441,353,000 | 42,180,720,000 | 831,422,700,000 |
ALLOTMENT (₦) | 27,191,353,000 | 40,015,720,000 | 436,712,700,000 |
STOP RATES (%) | 18.0000 | 18.5000 | 19.9400 |
PREVIOUS STOP RATES (%) | 17.0000 | 17.7900 | 18.3900 |
The market outlook suggests that the rising stop rates reflect tighter liquidity conditions, partly due to increased borrowings by the government. Where this trend continues, future auctions may see further rate hikes. Investors seeking higher returns on risk-free instruments may find longer-tenor T-Bills attractive, while short-term investors may need to rethink their strategies. In addition, the rising borrowing costs for the government could impact fiscal planning where the trend persists.
Market participants are preparing for a significant shift in the DMO’s tenor mix at the FG Bond auction slated for today, with the reintroduction of the nine-year tenor (2033). However, with the 2031 bond no longer on offer, investors are expecting notable shifts in demand dynamics across different maturities.
This change in issuance strategy could have broader implications for liquidity, investor appetite, and overall market sentiment. Understanding the possible reasons behind this shift and its potential effects on yield movements and portfolio positioning is essential for investors.
Based on market expectations, the 2029 bonds are expected to close around the 19.50% level, and the 2033 bonds are expected to cross the 20% threshold. However, where demand for the 2033 bond is exceptionally strong, we can expect some yield compression, reinforcing investor confidence in the government’s debt sustainability efforts. This means that if there is a high demand, the yield on the bond could decrease since bond prices and yields move in opposite directions.
Nigeria’s inflation rate has played a crucial role in dictating the tune of monetary policy and influencing investor sentiment. Encouragingly, headline inflation eased to 23.18% in February 2025, marking its second consecutive month of decline. This is a significant improvement from January’s 24.48% (5.3% decline Month-on-Month) and a notable drop from the 31.70% recorded in February 2024 (26.9% decline Year-on-Year).
One of the key factors contributing to this decline is the recent rebasing of Nigeria’s Consumer Price Index (CPI). This adjustment has altered the weightings of various expenditure components to better reflect current consumption patterns, resulting in lower inflation numbers. While structural inflationary pressures persist, the rebasing has helped moderate reported inflation figures.
In addition, improved agricultural output and targeted government interventions in the food supply chain have contributed to stabilizing food prices, which had been a major driver of inflation. The food inflation rate fell to 23.51% year-on-year in February, down from 26.08% in January, offering some relief to consumers.
Another important factor has been the relative stability of the foreign exchange market. The recent appreciation of the Naira against major currencies has helped contain imported inflation, easing price pressures on essential goods such as fuel, raw materials, and consumer products.
The Federation Account Allocation Committee (FAAC) disbursed ₦15 trillion in 2024, a substantial 43% increase compared to the previous year. This surge in government transfers significantly influenced Nigeria’s financial markets, giving rise to liquidity conditions, bond issuance dynamics, and investor sentiment. Presently, as expectations for further FAAC payments heighten, market participants are assessing the impact of last year’s trends on financial conditions going forward.
In 2024, the sharp increase in FAAC disbursements injected considerable liquidity into the financial system. The banking sector and capital markets saw increased activity, with higher trading volumes in the bond market and improved market efficiency due to narrower bid-ask spreads. Investors became increasingly cautious, interpreting the rising disbursements as a sign of fiscal expansion, which raised concerns over debt sustainability.
The government’s bond issuance strategy was another key factor in market performance; while higher FAAC allocations helped stimulate economic activity, the need for additional borrowing to support spending led to increased bond supply. At times, this exerted upward pressure on yields, especially when revenue generation did not keep pace with expenditure. However, sectors such as infrastructure, healthcare, and education benefitted from the additional funds, creating new investment opportunities, particularly in corporate bonds linked to those industries.
As 2025 unfolds, financial market players are closely monitoring how the government manages fiscal policy and FAAC allocations. With inflation showing signs of moderation, the Central Bank of Nigeria (CBN) may have more flexibility in adjusting its monetary policy stance. Where inflation continues to ease, the CBN could consider rate cuts, which would improve sentiments in the fixed-income market. However, where inflationary pressures resurface, policymakers could maintain or even tighten their stance, which could keep bond yields elevated.
The outlook for FAAC payments later in the year also raises questions about fiscal sustainability and debt management. While increased disbursements could once again stimulate liquidity and drive economic activity, the government’s ability to balance spending with revenue generation will be critical. Where borrowing continues to rise without adequate revenue growth, concerns over debt sustainability may weigh on investor confidence.
Global market influences remain a key factor in the long term. Nigeria’s bond market is sensitive to external developments, including shifts in U.S. Federal Reserve policy and fluctuations in oil prices. Any sharp movements in these areas could have spillover effects in the local debt market.
Despite potential risks, the fixed-income market continues to offer attractive opportunities for investors who can strategically position themselves in response to evolving macroeconomic conditions. Market participants will need to closely monitor government policy actions, inflation trends, and global financial developments to maneuver the changing investment path.
Looking ahead, several key themes will influence market trends; where liquidity constraints persist, interbank rates will likely remain elevated, increasing borrowing costs for businesses and individuals.
In addition, where forex instability persists, businesses reliant on imports may struggle with higher costs, further driving inflation upward. On the other hand, where the CBN and government can effectively manage liquidity and appreciably stabilize the forex market, inflation could moderate, easing pressure on consumers and businesses.
A more stable financial environment will emerge if government interventions are effective in the coming weeks. However, continued uncertainty would mean businesses and investors should prepare for further market adjustments.
We expect fixed-income yields to remain elevated in the near term based on macroeconomic developments.
