Nigeria bond prices hold up post lending rate hike

Nigeria’s bond prices held mostly steady on Tuesday when thinning liquidity for short-term paper at the government auction drove investors to take positions at the secondary market, forcing yields down, dealers said.

Nigeria’s central bank monetary policy committee on Monday raised its benchmark interest rate for the fifth time this year in anticipation of upward inflationary pressures and to support the weakened local currency.

The MPC lifted its benchmark rate to 9.25 percent, up from 8.75 percent, a move at the top end of analysts’ expectations, which some bond dealers had hoped would push yields higher.

“We expected four year bonds and below to adjust 25 bps upwards while 7 year and above to adjust 40 bps. However, market reaction was short-lived as yields have started trading lower than yesterday’s close,” a dealer at Standard Chartered said.

“This  is largely driven by reduction in supply particularly for the short-end 3 year and below and a lack of a structured repo market,” he told Reuters.

The bond market had closed on Monday before the rate hike.

The yield on 3-year paper opened at 10.43 percent on Tuesday from 10.50 percent, while the 5-year debt yield eased to 11.22 percent from 11.34.

Nigeria issues sovereign bonds monthly to support the local bond market and fund its budget deficit. It is expected to issue longer-term papers to refinance existing short term debt ahead of maturity, dealers say, meaning investors can only buy short term paper from the bond market.

It sold 70 billion naira in 3-, 5- and 10- year debt last week at 10.5 percent, 11.25 percent and 11.49 percent at the auction. .

Dealers say the government will no longer issue the 3-year paper after October, meaning investors will be left with a limited volume of supply at the bond market.

Yields were expected to continue to trend lower in anticipation of liquidity injection from state-owned “bad bank” AMCON, set up last year to help recapitalise ailing lenders in Nigeria.

“We expect the 3 year and below to trade 50 bps point lower on low supply, while the longer term paper will correct upwards before year end,” another dealer said.

REUTERS