Overnight Rate, Bond Yields Rise as Liquidity Thins

Nigeria's overnight lending rates and yields on long term bonds rose on Wednesday after commercial lenders pre-funded their accounts with the central bank for currency purchases, soaking up system liquidity, traders said.

According to Reuters, the central bank has been trying to stimulate lending and stave off a recession in Africa's biggest economy after second quarter growth slowed owing to a persistent drop in oil prices and currency controls.

But liquidity started to shrink on Wednesday after the regulator debited lenders for currency purchases on behalf of customers and also withdrew government funds from the banking system to soak up liquidity, impacting the bond market.

"Liquidity is slowing down the buying spree," one trader said, adding that funds were also booking month-end profits.

Yield on the 20-year bond rose to 13.8 percent, up 29 basis points from its previous close, while the benchmark 10-year paper edged up 23 basis point to 13.35 percent as liquidity thinned out.

"We had a pension fund on the 20-year that stopped buying. When they stayed out of the market, yields went back up," another trader said.

Banking system liquidity opened lower at 385 billion naira ($1.93 billion) on Wednesday, lifting up overnight lending rates to 5.5 percent from 1 percent the previous day, traders said. Overnight rates have stayed as low as 0.5 percent in the past week.

Liquidity topped 1 trillion naira last week as the bank injected cash through repayment for matured open market (OMO) bills and refunds due to lenders after it reduced cash reserves requirements.

Traders expect additional OMO maturities of around 200 billion naira to hit the system in two weeks, coupled with government revenue disbursals of another 200 billion naira due month-end.