Interbank liquidity has been consistently short throughout the third quarter of 2024. Last week, however, the position shifted from a deficit in excess of N300 billion to a minor surplus of N107 billion.
At the 296th Monetary Policy Committee (MPC) meeting concluded on Tuesday last week, the Central Bank of Nigeria (CBN) hiked the MPR to 26.75% (exactly 800 bps higher than it was at the beginning of the year). The MPR was hiked by 50 basis points this time, from 26.25% to 26.75%, even though some analysts projected an increase of around 100 basis points. However, the decision to adjust the asymmetric corridor around the MPR to +500/-100 from +100/-300 basis points was more impactful (technically increasing the cost of funding in the interbank markets).
The MPR hike has been attributed to slowing down the galloping inflation in Nigeria, which moved from 33.95% in May 2024 to 34.19% in June 2024.
Naira traded as high as $/N1,620.00 and as low as $/N1,470.00. At the close of business on Friday, the Naira closed at $/N1,609.29 on the Nigerian Autonomous Foreign Exchange Market (NAFEM) window.
The recent trend of monetary and fiscal policies alignment in Nigeria has been a recurrent subject of analytical discourse in Nigerian financial circles. It is clear to the markets that the Central Bank of Nigeria (CBN) and Debt Management Office (DMO) have both agreed to sacrificially hike interest rates at whatever cost to defend the currency and combat inflation. The penultimate NTB auction closed at a stop rate of 21.24% for the 364-day benchmark compared to the latest auction which closed at 22.1% (an increase of 86 basis points). Similarly, the 2033 FGN Bonds auction has witnessed higher stop rates (increasing by 48 basis points from 21.50% to 21.98%) between the last 2 auctions.
The government’s resolve is made clear in the fact that despite the reduced volume of bonds offered (N150 billion less) for the 3rd Quarter, rates inched up across the auction (2029s printed at 19.89% (25 bps higher), 2031s closed at 21.00% (81bps higher) and 2033s stopped at 21.98% (48 bps higher)).
The NTBs auction was conducted on Wednesday with a subscription of over N373 billion and a total offer of N277,964,378,000 across all tenors. At the end of the auction, the total amount offered was exactly equal to the amount allotted, although there was a slight reclassification of allotted volumes from 91 and 182 days to focus on 364 days. After maintaining the 91-day and 182-day tenor stop rates three consecutive times, the 91-day closed at 18.5000% (an increase of 220 bps), the 182-day closed at 19.5000% (an increase of 206 bps), and the 364-day closed at 22.1000% (an increase of 86 bps).
We note that the increased stop rates have substantial implications and impacts on the economy, secondary market, traders, and investors.
Implications and Impacts on the Economy
Higher Borrowing Costs for the Government:
The government will face higher borrowing costs due to the increased stop rates. This means that servicing debt will become more expensive, leading to a higher fiscal burden on the government budget.
Crowding Out of the Private Sector:
With the government offering high yields on its securities, private sector entities may find it more challenging to attract investments. Investors might prefer the safer, higher-yielding government securities over private sector bonds or equities, reducing business capital availability.
Inflationary Pressures:
Higher stop rates generally translate to higher interest rates in the economy. This could lead to increased borrowing costs for businesses and consumers, potentially dampening spending and investment.
Effects on the Secondary Market
Elevated Yields:
The secondary market will see an upward adjustment in yields for existing securities to align with the higher stop rates of newly issued securities. The adjustment would cause a decline in the prices of existing bonds and NTBs, as yields and prices are inversely related. This could lead to traders selling existing portfolios to buy the higher-yielding bonds at the primary market.
Liquidity Impacts:
Higher yields on new issues could attract more investors to the primary market, potentially reducing the liquidity in the secondary market. Investors may prefer holding new, higher-yielding securities rather than trading in the secondary market.
Market Sentiment:
A sustained tightening monetary policy stance will affect market sentiment. Investors might become cautious, leading to lower trading volumes and increased volatility in the secondary market.
Opinion
Going forward, investors seeking fixed income might welcome the higher stop rates, as these provide better returns on their investments. This is particularly appealing for risk-averse investors looking for safer investment options.
Institutional investors, such as pension funds and insurance companies, may need to rebalance their portfolios to reflect the higher yields. They may shift more of their funds into government securities to take advantage of the higher returns.
Despite higher yields, investors could become more concerned about the government’s ability to service its debt, especially where the fiscal burden increases significantly. This could lead to a reassessment of the risk premium demanded by investors.
Oil prices experienced a modest decline last Tuesday, reaching a six-week low, driven by growing optimism surrounding a potential ceasefire in Gaza and escalating concerns about demand in China. That marked the lowest closing figures for both Brent and WTI since June 7, 2024, pushing both benchmarks into technically oversold territory for the first time since early June 2024.
While crude oil prices were high in the first quarter of the year, Nigeria did not reap such benefits because crude oil production has remained below the 2024 budget target. As of January, Nigeria produced approximately 1.42 million barrels of crude oil per day, according to reports from the Organisation of Petroleum Exporting Countries (OPEC). The expected production in the budget was supposed to be 1.78 million barrels of oil.
According to Reuters, a marine tanker transporting oil sank in the Philippines, causing the death of a member of the crew of 17 present on board at the time of the incident. It was said that the ship was allegedly carrying about 1,494 metric tons of industrial oil.
The recent approval of Ethereum (ETH) ETFs by U.S. regulators marks a significant milestone in the evolution of cryptocurrency investments. This decision expands the avenues for investors to participate in major cryptocurrencies and mirrors the earlier approval of Bitcoin (BTC) ETFs, which have already garnered substantial investor interest since their introduction earlier this year. By packaging Ethereum in the ETF format, the accessibility to traditional investors is greatly enhanced, as these funds can be bought and sold through standard brokerage accounts, making them more familiar and easier to integrate into existing investment strategies.
The path to approval was not without uncertainty; however, a pivotal shift occurred in late May 2024, when SEC officials unexpectedly engaged with ETF issuers after a prolonged period of minimal communication. This sudden engagement culminated in the SEC’s approval of a crucial filing on May 23, 2024, paving the way for the full approval of Ethereum ETFs.
Matt Hougan, Chief Investment Officer at Bitwise, emphasised the significance of this development, stating, “We’ve now fully entered the ETF era of crypto,” highlighting how investors can now access over 70% of the liquid crypto asset market through low-cost Exchange-Traded Products (ETPs).
For Kyle DaCruz, Head of Digital Assets at VanEck, the approval validates the belief that investors should have accessible and familiar vehicles for Ethereum exposure. DaCruz likened Ethereum to “the open-source App Store” of the blockchain realm, illustrating its role as a gateway to numerous applications leveraging blockchain technology.
Beyond its technological capabilities, Ethereum’s approval reflects broader mainstream acceptance and recognition of cryptocurrencies beyond Bitcoin. Ethereum’s smart contract functionality and its role in supporting decentralised applications (dApps) position it alongside Bitcoin as a viable investment option now accessible through the established vehicle of ETFs. This accessibility is anticipated to broaden Ethereum’s appeal, potentially attracting significant capital inflows like those observed with Bitcoin ETFs earlier this year.
Additionally, the approval process underscores a maturing regulatory environment that is evolving toward a more nuanced evaluation of cryptocurrency-based financial products. This shift indicates a growing acceptance of digital assets among institutional and retail investors alike. As the landscape continues to evolve, the availability of Ethereum ETFs represents a crucial step towards integrating digital assets into diversified investment portfolios, offering both exposure to innovative blockchain technologies and potential diversification benefits.
The approval of Ethereum ETFs by regulators in the U.S. signifies not only a milestone in cryptocurrency investment accessibility but also signals a broader shift towards mainstream adoption and regulatory acceptance of digital assets in the global financial ecosystem.
As we look forward to the coming weeks, one thing remains sure; while these higher rates offer better returns for investors, they also pose challenges for the government and private sector due to the likelihood of increasing borrowing costs and potentially crowding out private investment. The secondary market is likely to experience higher yields and lower prices, impacting liquidity and trading volumes. The markets will keep monitoring progress with exchange rates and inflation to ascertain when and where Nigerian fixed income yields finally peak.
