Overnight Rate, Bond Yields Fall on Excess Liquidity

Nigeria's overnight lending rates and bond yields continued to fall on Friday as excess liquidity injected into the banking system by the central bank signalled that Africa's biggest economy may be considering loosening monetary policy.

The central bank has been injecting cash into the banking system to stimulate lending and stave off recession, after Africa's top oil producer suffered a shock as oil prices plunged to record slow growth in the second quarter.

Banking system liquidity in Africa's biggest economy opened at over 1 trillion naira credit on Friday, driving down overnight lending rates to 0.5 percent, traders said. Though lenders were not willing to trade at the low interbank rates, traders said.

"Markets will continue to be awash with liquidity (but) this is not long-term funds for lending until banks know what the central bank wants to do," one trader told Reuters.

The central bank on Thursday repaid open market bills (OMO) injecting 280 billion naira into the banking system, traders said, adding that the regulator had not issued fresh bills to mop up funds in the past three weeks.

Though system liquidity dropped marginally as some lenders transferred 700 billion naira government revenue to the treasury single account (TSA) with the central bank on Friday, traders were expecting 600 billion naira credit over the next two weeks.

Traders said the excess liquidity has spurred renewed buying from commercial banks and pension funds.

Falling Bond Yields
Last month liquidity dried up as authorities ordered commercial lenders to move government deposits into a single account at the central bank, part of an anti-graft drive.

The central bank then lowered cash reserve requirements for lenders to 25 percent from 31 percent in a bid to loosen monetary policy but left its benchmark interest rates on hold at 13 percent.

The secured open buy back (OBB) -- the rate at which lenders can borrow from the interbank market using treasury bills as collateral -- fell to 0.5 percent on Friday, 12.5 percentage points below the central bank's benchmark interest rate.

Analysts doubted the excess cash would trickle down to businesses by way of lending as lenders and pension funds look to the bond market for yield.

Yield on the 10-year bond fell to 12.90 percent on Friday, its lowest level since November, down from 13.10 percent on Thursday driven by excess liquidity, traders said.

The benchmark 2024 bond, which has traded as high as 17.32 percent this year, sold at 13.87 percent at Thursday's primary auction, traders said.