Yields on Nigerian government debts spike after rate hike

Investors are flocking to Nigerian government debt instruments, pushing yields to record highs across board following the Central Bank of Nigeria’s (CBN) decision to raise the benchmark interest rate.

The CBN had at the end of its Monetary Policy Committee (MPC) meeting last month raised the benchmark interest rate (MPR) by a record 400 basis points to 22.75 percent in a bid to curb inflation.

“The MPC’s hawkish stance underscores its continued dedication to tackling inflationary pressures. We anticipate a negative effect on the equity market, with potential selloffs, as investors reallocate funds to the fixed-income market to take advantage of the elevated yields. On the other hand, we expect the higher yields to further spur foreign investors’ interest in the domestic fixed income market,” Meristem analysts said in their post-MPC note.

According to them, the upward adjustment is anticipated to stimulate a further uptick in fixed-income yields in the immediate term, “as investors seek higher rates on risk-free instruments to align with the prevailing yield environment”.

Considering the effect of the high cash reserve ratio on banks’ ability to expand their loan books, they expect an increase in bank’s activities in the fixed income space, especially at the Treasury bills market, saying this may support the case for higher participation, demand and rates on government debt instruments.

The Nigeria Treasury Bills (NTB) auction saw strong investor demand last Wednesday with a stop rate of 21.49 percent, up from 19 percent at the last auction for the 365-day instrument and true yield of 27.3 percent.

Subscriptions for the long-end T-Bill exceeded N1.3 trillion, four times the N312.9 billion offered. Nigerian T-Bills are short-term debt instruments issued by the CBN on behalf of the federal government with less than one-year maturity period.

The OMO bills rates witnessed high investor interest after the MPR hike, with a stop rate of 21.5 percent and true yield of 27.3 percent. CBN sold N1.01 trillion worth of OMO bills at the recent auction, over three times the N350 billion on offer.

OMO is a liquidity management tool issued by the central bank to control the volume of money in circulation. When the CBN observes there is excess money in supply, it sells OMO bills to investors through the banks to mop up the surplus funds and vice versa.

The FGN Savings Bond was not left out of the rally as rates increased to record high. The Debt Management Office offered 16.097 percent on the three-year tenor and 15.097 percent for the two-year tenor.

“While we expect a continuous increase in yield level on fixed income instruments, the trajectory of rate increases is not indefinite. We anticipate periodic fluctuations in yield movements influenced by factors such as system liquidity levels, investors’ demand, and the imperative to moderate government borrowing costs,” Meristem analysts said.

“We expect that the higher MPR will limit the issuance of corporate bonds as corporate issuers will remain conscious of higher borrowing and refinancing costs. Nonetheless, we expect companies seeking to raise commercial papers to offer attractive rates (within the range of 22 percent to 22.75 percent) as premium over the risk-free rate,” they added.

In the secondary market on Thursday, sell-side action dominated the NTB space owing to tighter liquidity, as yields rose by 133 basis points (bps) and 63bps on the 182-, and 364-days bills to close at 19.07 percent and 23.69 percent respectively.

In the bond space, bearish sentiments returned as Thursday’s yields rose on average by 110bps due to the hawkish stance of the monetary authority. In the OMO space, trading activities were relatively quiet; however, yields rose by 1bp on average.

Before the recent rally that was driven by Transcorp Power listing, Nigeria’s equities market had in February halted its extended bullish run (its first monthly contraction in five months), with the All Share Index of the Nigerian Exchange Limited declining by about 1.16 percent decline (versus 35.28 percent in January 2024).

The Philip Anegbe-led team of research analysts at CardinalStone said the sell-offs and weak domestic investors’ sentiment reflected, among others, the improvements in auction stop rates and the consequent increase in the effective yield of fixed-income securities.

They said the central bank’s monetary tightening aligned with the improvements in auction stop rates, which enhanced the attractiveness of fixed-income securities and drove some rotation out of equities.

Ore Odetunde, a research analyst at Anchoria Asset Management, said the hawkish stance of the CBN is a step in the right direction, as monetary policy has remained quite expansionary since the economic recession in 2016.

“The shift to a hawkish stance which has caused yields on short-dated instruments to remain higher than long-dated instruments, an inverted yield curve, will help stem the speculatory demand on FX, reduce negative real returns on fixed income instruments, and incentivise foreign portfolio investments. The influx of foreign capital will help strengthen our FX reserves, and inject liquidity into the FX markets,” she said.

Odetunde said that this was further compounded by the CBN’s overdraft to the federal government, credit intervention schemes, and persistent depreciation in the naira.

Olayemi Cardoso, governor of the apex bank, had said during an investor call recently that they had plans to push interest rates higher and guided them to higher stop rates at the OMO and T-Bill auctions. He said that the stop rates are expected to edge closer to the MPR.

“The CBN governor’s hawkish stance with all of the short-term instruments is working and it’s attracting hot money from foreign portfolio investors,” a Lagos-based fixed income analyst said.

The stop rates on the middle and short tenor of T-Bills witnessed marginal increase. The stop rates on the 182-day bills increased by 2.9 percent to 18 percent, while the 91-day bills increased by 1.4 percent to 17. 24 percent.

The FGN Savings’ three-year bond tenor increased to 16.097 percent from 13.751 percent while that of the two-year bond tenor increased to 15.097 percent from 12.751 percent.

“The savings bond is the lowest hanging fruits retail investors can get such rates asides mutual funds because of its low entry offer of N5,000, but large investors go for T-bills where they can be more aggressive with returns,” Ayooluwa Ogunwale, fixed-income analyst at FBNQuest, said.