Anticipated inflows could ease funding rates: A review of Nigeria’s fixed income & FX markets

Nigeria's money market has seen significant activity in the past week, with over 500 billion Naira maturing in the system. Despite this, the Central Bank of Nigeria (CBN) has been proactive in injecting liquidity to offset the impact of the maturing funds. This intervention has helped stabilize yields which rose to around 10-15% last week. Looking ahead, an additional influx of liquidity is expected this week, with approximately 1.4 trillion Naira expected from coupon issues and 357 billion Naira from old maturities. The CBN's intervention, however, has switched from accommodative to contractionary, aiming to prevent excessive liquidity that could lead to inflationary pressures. Stable FX rates and foreign investor participation are key focus areas for the CBN amidst upcoming maturities. The anticipation of inflows and easing funding rates are crucial narratives driving market sentiment. Dipo Ajayi, Head of Fixed Income and FX at Chapel Hill Denham, highlighted the shift in CBN's policy and the importance of maintaining moderate funding rates to safeguard against capital flight. The market is poised for interventions from the CBN later this week to manage liquidity levels. The recent surge in oil prices following events in Saudi Arabia is another factor influencing market dynamics. Influx of funds and potential investments from external sources are expected to buoy Nigeria's financial markets. Ajayi emphasized the attractiveness of the Nigerian market given current global economic stability. Investors are drawn to the short end of the market, particularly T-bills, due to higher yields compared to longer-dated bonds. The Debt Management Office's cautious approach to borrowing has also contributed to the stability of the bond market. Ajayi noted that the money market stands to benefit from the surge in oil prices, albeit temporary, as it could lead to increased reserves and attract more investor interest. The positive external dynamics, including the ECB's quantitative easing, are aligning favorably for Nigeria's financial markets. The CNBC interview shed light on the strategic approach needed to leverage these market conditions and drive sustainable growth in Nigeria's fixed income and FX markets.