Was it expected? Yes. To this scale? Yes. Inflation has gone totally out of hand, and you can call it what it is, a global issue, so you cannot ignore it. Nigeria for the longest time has traded in isolation of the global markets given the substantial amount of local liquidity but we are now in unchartered territory. Interest rate increased by 150bps to the highest it has been in more than two decades. Of a more significant immediate impact is the 500bps increase in CRR to be provisioned by Thursday at each bank. This will result in the banks needing to raise about 2.5trn in short-term liquidity even though we opened 230bn short yesterday. This will be tough, and we would expect to see some ridiculous rates on the short end of the bills curve if at all there are any buyers. PMA today will be highly impacted by this liquidity event, and we don’t expect to see significant participations except from the asset managers. FD should see a more significant impact of this new policy as banks continue to struggle with naira liquidity.

The UST 10yr crossed 4% for the first time since 2008, and the low-interest rate environment as we know it has shifted. Do we chase economic growth or fight inflation? This is the question everyone is facing, and the answer seems the same everywhere, the value of the currency cannot be left to be totally eroded by inflation. The increase in MPR was significant both for size and the tone in the follow up where he continued to reiterate the inability of the MPC to act in isolation with inflation going over the roof. This left room for continued MPR hikes if inflation cannot be reined in, this leaves the market in a bearish state with more uncertainty.

Is there value at this point? Well, we have been trading in a negative real rate environment for as long as we can recall in the market. We do not see a change in the short term and any over exaggerated sale in assets will be met by demand from those looking to improve their average holding yields. Loss aversion is prevalent in this market, hence the only bonds that would see activity would be the auction bonds and those that are seriously mispriced like the longest end of the curve. We would expect little to no activities on the short end as any real sale will be met by demand from asset managers with mandate to buy the short end of the curve.

Where do we reprice to? We would expect a minimum of 75-100bps revaluation on the 28s and beyond with the auction bonds probably suffering the most at around 100-200bps reprice. It will be a tough day to make markets, but we will be here working tirelessly to ensure swift and best execution when we see your mandates.

What a roller coaster end to the week we have!!!

Have fun trading and Goodluck!!!

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