Yields Slide as Inflation Exposure on Naira Assets Widen

Yields Slide as Inflation Exposure on Naira Assets Widens

In the fixed income market, the average yields on government instruments were turned sideways as investors weighed the effects of the rising headline inflation rate on naira assets.

On Monday, the National Bureau of Statistics reported that the consumer price index for the month of September worsened to 20.77% year on year, from 20.52% in August 2022. Market analysts said the upward tick in the consumer price index widens real return on investment, and could further impacts spot pricing in the primary market.

At the last Treasury bills primary market auction conducted by the Central Bank of Nigeria (CBN) for maturing bills, spot rates on 364-day surged to 13%. The new market dynamics seen were spurred by a 400 basis points increase in benchmark interest rate by the monetary authority between May and September 2022.

Rate hikes, according to some analysts, will have less impact on the rising inflation rate because of disruption in the global supply chain driven by both the outbreak of the Covid-19 pandemic and now worsen by Russia-Ukraine war.

In the Investors’ and Exporters’ foreign exchange (FX) window, the naira appreciated by 0.1% to N441.25 per the United States dollar. For the local currency, appreciation is a big word as it appears as naira could only be recovering from its weak position.

Based on the trading patterns, the sustainability of the local currency appreciation is very doubtful – having exhibited the same pattern over time. READ: Naira Lost Against Dollar as Parallel Market Spreads Widen

The demand level at the window is expected to remain high due to reliance on imports for driving the Nigerian economic productive capability in the private sector – especially, the manufacturing concerns.

Yesterday, there were moderate burdens in the money market as short-term rates were relatively flattish due to what analysts call the absence of significant financing pressures.

Data from the FMDQ Exchange platform showed that the overnight lending rate was flat at 16.5%. In a market report, analysts at Cordros Capital stated that the average system liquidity closed at a net short position of N110.34 billion.

MarketForces Africa reported that opening market liquidity was reported at N269.3 billion on Friday. Thus, the overnight and repo rates closed within a range of 16% – 23%, according to a Coronation Research note.

“… We expect rates in the money market to remain elevated, as the projected outflow is expected to outweigh potential inflow. The projected outflow this week is expected from a potential CRR debit and an FGN bond auction. Meanwhile, estimated inflow is expected from coupon payment”, according to Coronation.

In the treasury bills secondary market, trading activities were muted, as the average yield closed flat at 7.3%. Elsewhere, the average yield pared by a basis point to 10.3% in the OMO bills segment.

However, selling pressure was seen on pockets of trade in the bond market after the finance minister’s debt restructuring gaffe spurred portfolio rebalancing in the debt capital market.

Thus, investors in the bond secondary market traded with mixed sentiments, but with a bearish tilt, as the average yield expanded by a basis point to 13.7%.

Across the benchmark curve, Cordros Capital analysts said the average yield was unchanged at the short and mid segments, but expanded at the long (+3bps) end due to the selloff of the MAR-2035 (+12bps) bond.

# Yields Slide as Inflation Exposure on Naira Assets Widen#

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