Yields on the Federal Government bonds fell on Wednesday after the Central Bank of Nigeria (CBN) held interest rate at 12 per cent, with a boost to liquidity from maturing debts and oil revenues expected to push yields down further, dealers said.
The CBN had left its benchmark interest rate on hold on Tuesday for the fourth time in a row at its by-monthly meeting, citing slowing economic growth and rising inflation, which spurred demand for bonds at current yields.
Traders said investors had been holding off from taking a position pending the rate decision.
Financial markets were closed on Tuesday when the rate decision was made.
On Wednesday, yields on the shortest three-year bond, which has less than two years to maturity, fell to 14.75 per cent, from Tuesday’s close of 15.1 per cent.
“The reaction is (also) on the back of bond maturities on May 22nd and another expected on the 25th totalling N295 billion,” said Ayodeji Adelagun, head of rates and credit trading at Standard Chartered Bank.
Bond prices were moving up, as proceeds from the May 22 maturity and expected flows from the May 25 one are reinvested, he added.
Dealers said the decision to hold rates lifted a layer of doubt over what steps the CBN might take to stabilise rising price levels in the Nigerian economy, after April inflation rose to 12.9 per cent.
The five-year bond was trading at 15.18 per cent on Wednesday, compared with 15.25 per cent before the rate decision.
The Federal Government will retire N295 billion worth of maturing three- and five-year debt issued at 10.5 per cent next week, boosting bond liquidity. The CBN will auction N126.33 billion in T-bills to soak up some of it.
“We expect yields to drop up to 50 basis points, across maturities next week, with the lower end of the yield curve the worse-hit,” a dealer at a mid-tier Nigerian lender told Reuters.
The CBN has favoured positive real interest rates in Nigeria to encourage foreign participation in the bond market and support the naira. It had hiked rates six times last year to fight inflation, pushing yields up.
Dealers say greater liquidity is preserving that trend.
On Friday, the Federal Government distributed N563.09 billion in proceeds from oil sales in April to its three tiers of government, which is also expected to feed into the banking system next week, dealers said.