Rising headline inflation rate worsens Real-Yield on T-bills

Positive Performance Sustained In Local Bourse
Domestic Bourse Starts The Week In Red

According to the Nigerian Bureau of Statistics (NBS), Nigeria’s headline inflation rate for Nov-19 rose to 11.85% y/y, 25bps higher than the Oct-19 level. Notably, the food and core inflation subindices both accelerated 39bps and 12bps to 14.48% y/y and 8.99%y/y respectively. For context, the prices of food items that had hitherto benefitted from informal cross-border trades (cereals, frozen foods as well as oil & fats) mounted the highest pressure on the food inflation sub-index, while pressure on the core component may be linked to increased system liquidity during the period.

Conversely, the average yield on short-term securities in the fixed income market continues to trade at a single-digit level. Notably, the yield on the 91-day bill closed at 5.06%, the 182-day bill closed at 5.49% and the 364-day bill closed at 7.01%. From a more technical point of view, the above implies that real yield on short-dated instruments continue to dip, now at -6.0% as PFAs and other institutional investors continue to pile up their funds on government bills.

By our estimate, the headline inflation rate will inch higher to 12.0% in Dec-19, as border closure and year-end demand pressure subsist. By implication, the real yield on short-dated bills will worsen amid rising system liquidity.

United Capital Research