Geopolitical Tensions, Inflation Risks To Keep Rates Elevated – FMDA

The Financial Markets Dealers Association (FMDA) has said that rising geopolitical tensions and persistent inflationary pressures are likely to keep interest rates elevated, sustaining attractive returns on short-term fixed-income instruments despite earlier expectations of monetary easing.

In its post-Monetary Policy Committee (MPC) commentary titled, “What the MPC Hold Means for Your Portfolio,” the association said the Central Bank of Nigeria’s (CBN) decision to retain the Monetary Policy Rate (MPR) at 26.5 per cent reflects a cautious monetary policy stance driven by global uncertainty, the Middle East crisis and inflation concerns.

According to FMDA, the prolonged high-interest-rate environment means investors in Treasury bills, Open Market Operations (OMO) bills, commercial papers and fixed deposits are likely to continue enjoying relatively attractive returns.

“The implication for investors is that the era of elevated yields is not over yet,” the association stated, adding that short-term fixed-income instruments are expected to outperform in the current environment.

FMDA noted that although some investors initially interpreted the CBN’s February rate cut as the start of a broader easing cycle, renewed geopolitical tensions and rising global bond yields have weakened that expectation.

The association disclosed that average Nigerian bond yields, which stood at about 15.86 per cent in February when the apex bank last reduced rates to 26.5 per cent, have risen to around 16.20 per cent, indicating that the bond market is already pricing in a prolonged high-interest-rate regime.

“This means the bond market is already pricing in a ‘higher-for-longer’ interest rate environment,” FMDA said.

The report further revealed that findings from its recent Financial Market Risk and Liquidity Survey, conducted among traders and treasurers in May, showed that most market participants expect rates to remain elevated over the next six months, despite adequate liquidity in the financial system.

“However, market participants broadly expect interest rates to remain elevated over the next six months, reflecting continued caution within the financial system,” the association noted.

FMDA also highlighted the differing impacts of rising yields on long- and short-term securities, noting that holders of long-dated bonds have suffered greater valuation losses as yields have increased.

According to the report, an investor holding an 11-year Federal Government bond valued at N5 billion would currently record a valuation loss of about N87.1 million compared to the February yield environment.

In contrast, an investor holding a short-term 142-day instrument of the same nominal value would record a significantly smaller valuation loss of approximately N2.7 million.

“This highlights how long-term securities are significantly more sensitive to changes in interest rates than short-term instruments,” the association said.

On the equities market, FMDA maintained that investor sentiment remains positive despite elevated interest rates, noting that the stock market has continued to post strong returns.

“Since then, the market has significantly moved in that direction, with returns now rising to 60.87 per cent as of May,” it stated.

FMDA added that the CBN’s latest decision suggests that monetary easing in Nigeria may proceed more gradually than previously anticipated, as global central banks continue to adopt a cautious stance amid inflation risks, energy costs, and geopolitical tensions.