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Nigeria Fixed Income Flash Note - Fixed income yields heading south?

Fixed income yields heading south?                                                                     

Though a mix of sticky inflation and consistent liquidity mop ups have kept yields in the fixed income market elevated for most of 2017, we have observed a marked moderation in yields in the past month. The trend is most pronounced in the T-bills secondary market where yields have taken a cue from lower primary market rates, declining 115bps on average between 31st of August and 27th of September.                                                                            

Yield moderation has been guided by the Central Bank of Nigeria (CBN) signaling its intent to lower market rates, reflected in its move to stop the sale of long dated bills at its regular OMO auctions, cutting off supply and spurring strong demand on the bill in both primary and secondary markets. Specifically, stop rate for the 364DTM bill at the PMA declined from 18.52% on the 30th of August to 17.00% on the 20th of September. Unsurprisingly, amidst a more stable economic and foreign exchange rate environment, market participants have downwardly revised their near-term yield expectations, prompting more aggressive buying in the fixed income market.               

Forward guidance at the recent MPC meeting strongly suggests no change to core monetary policy levers until 2018 and the CBN should continue to manage liquidity as an anti-inflationary tool. However, with the high cost of government debt servicing remaining a concern, we expect to see further measures to address this, and anticipate further CBN nudges to lower market rates. In particular, we see yields in the secondary market being guided by the frequency of OMO auctions, as well as rates at which these auctions are closed. Finally, bond yields would continue to take a cue from the movement in T-bill yields as Nigeria’s yield curve slowly normalizes towards the end of the 2017.