Nigeria’s financial markets experienced significant volatility this week, driven by liquidity pressure and monetary policy developments. The overnight rate surged by 753bps to 32.5%, indicating a severe tightening of liquidity conditions in the financial system. This surge was attributed to the dual impact of last Friday’s late OMO auction (NGN264.33 billion) and Tuesday’s CRR maintenance debits (c. NGN500.00 billion), which put significant pressure on the liquidity in the system.
In the Treasury bills secondary market, the average yield across all instruments advanced by 83bps to 23.4%, as market participants, especially banks, sold off bills to satisfy their funding needs. The average yield expanded by 69bps and 91bps to 22.8% and 24.4%, respectively, at the NTB and OMO segments.
The FGN bonds market was mixed, with most activities observed at the short and long ends of the curve. As a result, the average yield expanded by 2bps to 18.8%. Across the benchmark curve, the average yield advanced at the short (+8bps) end, following sell pressures on the MAR-2025 (+17bps) bond but closed flat at the mid-segment. Conversely, the average yield pared at the long (-1bp) end as players demanded the MAR-2035 (-28bps) bond.
In the foreign exchange market, the naira depreciated further by 0.3% to NGN1,509.67/USD, despite a 13-month high in FX reserves, which rose by USD465.21 million to USD34.66 billion as of July 4. The total turnover at the Nigerian Autonomous Foreign Exchange Market (NAFEM) decreased by 43.0% WTD to USD678.58 million, with trades consummated within the NGN1,430.00/USD – NGN1,550.00/USD range.
Analysts attribute the market volatility to liquidity pressure, driven by the CBN’s liquidity management efforts and weak inflows from the apex bank. They expect the system liquidity to remain subdued next week, with possible net issuance at the NTB auction exerting more pressure on liquidity levels.
The sustained dearth in system liquidity is expected to undermine demand for instruments in the T-bills secondary market, causing yields to expand further. However, pockets of demand may emerge for attractive maturities, given the reduced supply indicated in the recently published Q3-24 bond issuance calendar.
For the rest of the year, analysts maintain their medium-term expectation of elevated yields due to anticipated monetary policy administration globally and domestically, as well as sustained imbalance in demand and supply dynamics. They also expect FX liquidity to remain frail in the short term, amid no significant supply from the CBN, thus sustaining the weakness in the naira.
