
January 31, 2025/CSL Research
In 2024, fixed-income yields across the curve surged by 8.38 percentage points, primarily driven by the Central Bank of Nigeria’s (CBN) tight monetary policy and aggressive fiscal borrowing. In response to persistently high inflation, the CBN raised the monetary policy rate by 875 basis points, with interbank lending rates also reaching record highs. The CBN’s Open Market Operations (OMO) helped drain liquidity from the financial system, leading to negative system liquidity that often forced banks to rely on the CBN’s discount window for funding. By the end of Q3 2024, borrowings through the Standing Lending Facility (SLF) had ballooned to ₦27.95 trillion, a staggering 691.8% increase from ₦3.53 trillion in Q3 2023.
Net monthly borrowing for 2024 averaged ₦371.66 billion. On the government side, net borrowing exceeded ₦10.46 trillion (compared to ₦5.49 trillion in 2023) through bonds and NTBs, further fueling high yields. Average yields across the short, mid, and long ends of the curve increased by 14.09%, 6.98%, and 2.94%, respectively, year-on-year.
In 2025, fixed-income yields are anticipated to moderate in relation to levels seen in the prior year, buoyed by expectations around liquidity inflows and moderation in inflation anticipated toward the latter half. Specifically, a 75-100bps reduction is expected at the long end, and a 150-200bps reduction at the short end, as the year progresses. The government’s fiscal deficit for 2025 is projected to reach ₦13.30 trillion, with around ₦10.00 trillion likely raised domestically, and the remainder from the international market.
Assuming 15% of domestic borrowing is allocated to dollar-denominated domestic bonds, this implies monthly issuances of approximately ₦708.33 billion. This elevated borrowing might likely keep interest rates sticky to attract investor demand.
On the liquidity front, around ₦31.26 trillion is expected to enter the financial system in 2025, from maturities of NTBs, bonds, OMO instruments, and bond coupons. In Q1 2025, bond coupon inflows are expected to exceed ₦1.2 trillion, with ₦406.67 billion maturing from the 13.53% FGN MAR 2025 bond.
The CBN is likely to remain cautious about excess liquidity throughout the year, with the initial liquidity inflow in Q1 providing the Debt Management Office (DMO) and Central Bank of Nigeria (CBN) an opportunity to lower market rates on new issuances. By the third quarter, liquidity may tighten, which could push yields higher again.
By the end of the year, inflation is expected to moderate, which may allow the CBN to adopt a slightly dovish stance. This shift could lead to a modest decline in fixed-income yields in the final quarter.
Based on this outlook, investors are advised to adopt a short-duration strategy in the early months of the year, transitioning to a long-duration position as the year progresses and inflationary pressures ease. An additional factor to consider is the rebasing of the Consumer Price Index (CPI). If completed earlier than expected, it could accelerate the deceleration of inflation, prompting the CBN to implement more substantial and earlier rate cuts. This scenario could lead to a sharper and earlier decline in yields than currently anticipated.