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Bond yields fall after rates held

24 May 2012, 08:04

 Lagos - Yields on government bonds fell on Wednesday after the central bank held rates at 12 percent, with a boost to liquidity from maturing debts and oil revenues expected to push yields down further, dealers said.

The central bank left its benchmark interest rate on hold on Tuesday for the fourth time in a row at its by-monthly meeting, citing slowing economic growth and rising inflation, which spurred demand for bonds at current yields.

Traders said investors had been holding off from taking a position pending the rate decision.

Financial markets were closed on Tuesday when the rate decision was made. On Wednesday, yields on the shortest three-year bond, which has less than two years to maturity, fell to 14.75 percent, from Tuesday's close of 15.1 percent.

"The reaction is (also) on the back of bond maturities on May 22nd and another expected on the 25th totalling 295 billion naira," sid Ayodeji Adelagun, head of rates and credit trading at Standard Chartered Bank.

Bond prices were moving up, as proceeds from the May 22 maturity and expected flows from the May 25 one are reinvested, he added.

Dealers said the decision to hold rates lifted a layer of doubt over what steps the central bank might take to stabilise rising price levels in Africa's second biggest economy, after April inflation rose to 12.9 percent.

The five-year bond was trading at 15.18 percent on Wednesday, compared with 15.25 percent before the rate decision.

Government will retire 295 billion naira worth of maturing three- and five-year debt issued at 10.5 percent next week, boosting bond liquidity. The central bank will auction 126.33 billion naira in T-bills to soak up some of it.

"We expect yields to drop up to 50 basis points, across maturities next week, with the lower end of the yield curve the worse-hit," a dealer at a mid-tier Nigerian lender told Reuters.

The central bank has favoured positive real interest rates in Nigeria to encourage foreign participation in the bond market and support the naira. It had hiked rates six times last year to fight inflation, pushing yields up.

Dealers say greater liquidity is preserving that trend.

On Friday, Nigeria distributed 563.09 billion naira in proceeds from oil sales in April to its three tiers of government, which is also expected to feed into the banking system next week, dealers said. (Editing by Tim Cocks and Catherine Evans)

- Reuters


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