Nigeria bond yields fall on liquidity boost aimed at lending

Nigeria bond yields fell sharply on Tuesday due to a liquidity surge on the money market, traders said, adding that the central bank was loosening monetary policy to try to spur credit growth.

The central bank has been injecting cash into the banking system since October in a bid to ease liquidity and stave off recession in Africa’s biggest economy, which has suffered as oil prices fell sharply since mid-2014.

Some banks, however, seem to be using the funds to invest in bonds rather than lending to households and businesses.

“The sharp compression of the yield curve associated with a significant build-up of liquidity in the system is starting to look like an intentional policy-driven shift,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank.

Nigeria’s 2017 bond fell the most, down 110 basis points to 6.9 percent, a level last seen more than five years ago, traders said. The five-year bond was yielding 8 percent, down from 15 percent at the start of April.

The 10-year benchmark bond shed 72 basis points to yield 10.25 percent while the 20-year tenor, Nigeria’s longest-dated bond, was trading at 11.93, down 38 basis points.

The liquidity surge has also shrunk treasury bill rates, which are down as low as 2.6 percent for three-month paper, prompting domestic funds to pile into longer-dated debt.

Banking sector credit rose to 850 billion naira ($4.3 billion) on Tuesday, lifted by repayment of maturing open market (OMO) bills and government funds. Traders say the central bank has not issued fresh OMO bills in a month to keep borrowing costs low.

Overnight lending rates traded between 0.5 and 1 percent on Tuesday.

“Bond yields could still move lower from here in the absence of new OMOs. Fixed income valuations will increasingly look unattractive and may be vulnerable to a reversal,” Gadio said.

Nigeria had maintained bond yields above inflation, currently at 9.4 percent, in order to attract foreign investors, who have since left as an oil price plunge weakened the naira currency and slashed government revenues. Authorities are now keen to get credit flowing to boost growth.

But lenders in Africa’s biggest economy are cutting loan growth to buy bonds, citing rising regulatory uncertainty and weak output growth. Stanbic IBTC on Monday said it grew loans marginally by 1 percent in the first nine months.

The Debt Management Office will auction five- and 10-year bonds on Wednesday to raise 50 billion naira, with traders expecting lower yields than at their previous sales.

“The level of liquidity … is driving bond demand among pension funds, insurance firms and banks. It seems like the only channel with higher returns presently,” one trader said, pointing to this year’s 15.8 percent fall in stock market returns.