The Central Bank of Nigeria's decision to reset its benchmark interest rate to 23 per cent from 26.5 per cent has led to a decline in Treasury bill stop rates across all tenors at the latest primary market auction. This move is expected to have implications for yields across the fixed income market. The stop rates for the 91-day, 182-day and 364-day Nigerian Treasury Bills contracted by 80 basis points, 70 basis points and 73 basis points respectively.
The decline in stop rates came as investors placed N4.23 trillion bids for the N600 billion offered by the Debt Management Office, representing a bid-to-offer ratio of 7.1 times. At the end of the auction, a total of N497.58 billion was allotted, implying a bid-to-cover ratio of 8.5 times. This significant oversubscription indicates strong investor demand for the Treasury bills.
According to Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto & Co, the rate cut is expected to exert pressure on fixed income yields, although it will support the ongoing rally in the equity market. This is in line with expectations that the reduction in interest rates will have a ripple effect on the overall financial market.
Analysts at Coronation Assets Management noted that they expect a further 100–150bps of compression over the next one to two auctions toward 15.00–15.50%, and then a stall. They also stated that the SDF reset to 20.00% narrows that negative carry to around 340bps, which mechanically supports the bid, but does not eliminate the constraint.
The analysts further noted that for the OMO rates and the direction of monetary easing, if OMO stop rates begin following the MPR lower, the easing cycle has genuinely begun. However, if they hold near 20 per cent while NTBs rally, the segmentation deepens and the ‘not easing’ message is confirmed by action rather than communiqué.
In terms of the impact on FGN bonds and the yield curve, the analysts stated that the reset compresses the very front most, produces modest gains in the 1–3-year sector, and leaves the long end anchored by 2027 supply and election risk premium. The net effect is bull steepening, more precisely, a disinversion, rather than a parallel rally.
Finally, money market fund and term deposit yields are expected to reset 150–200bps lower over the next six to eight weeks as the SDF change passes through. This is likely to have significant implications for investors and financial institutions in Nigeria, as they adjust to the new interest rate environment.
Key points
- The Central Bank of Nigeria's decision to cut its benchmark interest rate to 23% from 26.5% has led to a decline in Treasury bill stop rates across all tenors.
- The rate cut is expected to exert pressure on fixed income yields, although it will support the ongoing rally in the equity market.
- Analysts expect a further 100–150bps of compression in Treasury bill rates over the next one to two auctions.
