Following the Russia-Ukraine conflict and the following sanctions placed on Russia, energy, transportation, and commodity prices spiked, fueling inflation globally. Before the conflict, we already had expectations for aggressive monetary policy tightening following the accommodative stances adopted by major central banks in 2020 and 2021. Additionally, supply-chain disruptions remain in demand-supply disequilibrium. To curb inflation, major central banks have tightened their monetary policies. The high investor risk aversion has led to capital outflows from developing economies, triggering currency depreciation, bearish equity markets and high-risk premiums in bond markets.

We expect the global central banks to continue aggressive monetary stances. U.S. Fed’s median forecast indicated it could raise interest rates as high as 4.6% in 2023. Thus far in 2022, the CBN has reacted to the aggressive monetary stances abroad by tightening benchmark interest rates by a cumulative 400bps to restrict capital flight, attract FPIs and curb inflation. These actions will ultimately constrict domestic credit access and shrink liquidity in the medium term. These have led to an uptick in yields of Naira fixed income instruments. In the Eurobond market, we expect Nigerian Eurobonds continued sell-offs as investors jetty to safe and higher yielder instruments offshore. Average Eurobond yields have risen 207bps w/w. However, strong demand for dollar-denominated instrument may limit the yield ceiling in the Eurobond market.