2019 Yield Outlook & Strategy

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The CBN, in response to pressures on foreign exchange, doubled down on liquidity mop-ups – even at the expense of the haemorrhaging of reserves – for the utmost pursuit of stability in the exchange rate.

With elections just one week away, we expect yields to remain somewhat elevated in Q1-19 as the CBN continues its mop-up of naira liquidity to curb foreign exchange demand pressures. Currently, average yields are at 14.5% vs. 15.7% in December, supported by renewed offshore interest in the market.

Sources: FMDQ, United Capital Research

A retracement in yields would likely trail the successful conclusion of the election as political risk premia normalize, especially in light of the US Fed’s recent dovish tone. Nonetheless, we expect any potential demand during that period to be capped as uncertainties around the probable economic direction of the new government would likely cloak sentiments.

In terms of positioning, we recommend overweighing short-term bills ahead of the general election as it offers an enticing trade-off between risk and reward, and a potential place for investors to play defence. As political risk premia peaks, we recommend rapidly building duration to lock in funds at high yields across longer maturities. In addition, the scenario for the post-election period would depend on the interplay of retracement in yields after the election and the unsettling condition in the global space.

 

United Capital Research