Bond yields rise as liquidity thins

The nation’s overnight lending rates and yields on long-term bonds rose on Wednesday after commercial lenders pre-funded their accounts with the Central Bank of Nigeria for currency purchases, soaking up system liquidity, traders said.

The CBN has been trying to stimulate lending and stave off a recession in Africa’s biggest economy after second quarter growth slowed owing to a persistent drop in oil prices and currency controls.

But liquidity started to shrink on Wednesday after the regulator debited lenders for currency purchases on behalf of customers and also withdrew government funds from the banking system to soak up liquidity, impacting the bond market.

“Liquidity is slowing down the buying spree,” one trader told Reuters, adding that funds were also booking month-end profits.

Yield on the 20-year bond rose to 13.8 per cent, up 29 basis points from its previous close, while the benchmark 10-year paper edged up 23 basis point to 13.35 per cent as liquidity thinned out.

“We had a pension fund on the 20-year that stopped buying. When they stayed out of the market, yields went back up,” another trader said.

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Banking system liquidity opened lower at N385bn ($1.93bn) on Wednesday, lifting up overnight lending rates to 5.5 per cent from one per cent the previous day, traders said. Overnight rates have stayed as low as 0.5 per cent in the past week.

Liquidity topped N1tn last week as the bank injected cash through repayment for matured open market operations bills and refunds due to lenders after it reduced cash reserves requirements.

Traders expect additional OMO maturities of around N200bn to hit the system in two weeks, coupled with government revenue disbursals of another N200bn due month-end.

The yield on Nigeria’s 10-year bond had last Friday fallen to 12.90 per cent, its lowest level since last November.

The yield, which had recorded 13.10 per cent, fell that day as excess liquidity in the banking system was funnelled into the bond market, traders said.

The benchmark 2024 bond, which has traded as high as 17.32 per cent this year, had been sold at 13.87 per cent at primary auction, traders said.The banking system liquidity opened at over N1tn credit on Friday, driving down overnight lending rates to 0.5 per cent, traders said, with lenders not willing to deal at the low interbank rates.

credit: Punch