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Lending rate hits new low on CBN liquidity

By on October 4, 2015

The Nigerian overnight lending rate halved to three per cent on Friday to a three-month low after the Central Bank of Nigeria injected liquidity into the banking system by paying off Treasury bills, traders said.

A total of N197bn ($989.9m) in matured Open Market Operation bills was retired on Friday while the CBN did not issue fresh bills to mop up funds in a bid to keep borrowing costs low, traders said.

Reuters reported that traders expected another N300bn ($1.5bn) coming into the financial system after the central bank cut banks’ cash reserve ratio to 25 per cent from 31 per cent last week.

Liquidity had dried up on the interbank market two weeks ago after the Federal Government ordered banks to move government deposits into a Treasury Single Account at the CBN in line with President Muhammadu Buhari’s anti-graft drive.

Some of the new funds were filtering into bonds.

“Treasury bill yields are lower than bonds at the short-end hence locals are piling into bonds,” said one trader at a Nigerian commercial bank.

Domestic pension fund managers have been buying short-term bonds at higher yields as foreign buyers left the market after JP Morgan moved to evict Nigeria from a key emerging markets index.

A CBN official had said on Wednesday the banking system had enough liquidity to take up what foreign investors might sell after JP Morgan removed Nigeria from its bond index.

Banking system credit opened at N189bn on Friday before the inflow hit the system, lifting the sector’s total cash balance with the central bank to N386bn, traders said.

Yields on the benchmark 10-year bond, one of those to be delisted from the influential index, rose to 15.12 per cent, from 14.74 per cent last week.

The most liquid three-year bond traded at 14.76 per cent while the one-year Treasury bill was quoted at 13.84 per cent on Friday.

The Debt Management Office said it would re-introduce the benchmark 10-year bond in its fourth quarter debt sale, after not issuing them in the previous quarter.

The secured open buy back–the rate at which lenders can borrow from the interbank market using treasury bills as collateral — fell to three per cent on Friday, 10 percentage points below the CBN’s benchmark interest rate of 13 per cent.

 

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