Nigeria auction bonds at lower yields after surprise rate cut

Nigeria sold bonds on Wednesday at yields lower than the secondary market despite double-digit inflation, auction results showed, after an unexpected central bank interest rate cut aimed at stimulating the economy.

The debt office paid 8.94% for the longest 30-year paper, while the bond fetched 9.7% on the secondary market. The maturity received most of the subscription at the auction.

The debt office offered to sell 185 billion naira ($486.07 million) at the auction but sold 106.15 billion naira worth of debt.

The central bank on Tuesday cut interest rates by 100 basis points to 11.5%, to support an economy that contracted in the second quarter.

Yields on the secondary market fell an average of 30 basis points on Wednesday after the rate cut, traders said. The 10-year benchmark bond, with six years to maturity, sold for 6% at the auction.

The lower yields have triggered reinvestment risk for funds as existing bonds mature. In the past the central bank had kept yields high to attract foreign investors and dollars into the economy.

Now, money markets have been awash with liquidity after foreign investors dumped local assets following an oil price crash triggered by the novel coronavirus pandemic.

Central Bank Governor Godwin Emefiele said Tuesday’s rate cut was aimed at getting banks to lend to support the economy.

Yields on Nigeria’s bond market turned negative as inflation soared. The central bank projects inflation to hit 14.15% by year-end.

Liquidity on the banking system opened at 460 billion naira on Wednesday and has been in credit for more than two weeks.

The central bank has used unconventional policies to manage liquidity and has kept cash reserve ratios high to drain excess cash. Analyst fear this could pile pressure on the naira and force a large adjustment next year. ($1 = 380.60 naira)