FREE

Nigeria Fixed Income Flash Note - Tentative steps towards monetary easing

Tentative steps towards monetary easing
In a bid to tame inflation, the Central Bank of Nigeria (CBN) had conducted near-daily OMO auctions. However, the apex bank paused these liquidity mop ups on the 4th of December 2017. Following this, we have observed a significant improvement in system liquidity – average Interbank OBB of 8.9% vs. year average of 25.5%. Consequently, strong buying sentiment in the T-bills space has induced a notable moderation in market yields. In all, average T-bill yields moderated 230bps w/w between the 4th and 11th of December. In our view, the loosening of liquidity conditions is in line with apex bank guidance of imminent monetary easing in order to spur bank lending and stimulate economic growth.

In the same vein, the Debt Management Office (DMO) has revealed that it would settle ₦198 billion of maturing T-bills in December, rather than rolling them over at primary market auctions as is the usual practice. Along with the temporary stoppage of liquidity mop ups, the decision to settle the maturing bills would be a liquidity boost to the fixed income market and should lead to more yield moderation in the short term.

Whilst improved liquidity provides breathing room in the market, we highlight the risk excess naira liquidity poses on currently-downtrending inflation and a stable exchange rate. Amidst this, we do not think the CBN has relaxed its aggressive liquidity management position and anticipate a firmer grip on liquidity in the New Year, even as it looks towards a lower interest rate environment in the country. We foresee further yield moderation going forward.