bond market
Nigeria’s fixed-income market is entering a new phase as abundant domestic liquidity, strong demand for government securities and renewed access to international bond benchmarks combine to reshape investor positioning ahead of the Central Bank of Nigeria’s monetary policy meeting this week.
The latest market data show that investors continued to channel substantial funds into Treasury bills, Open Market Operations (OMO) bills and Federal Government bonds, even as the overnight funding rate edged higher and the naira weakened marginally.
System liquidity rose to a net long position of N3.27 trillion during the week, from N3.16 trillion previously, supported largely by OMO maturities. The increase came despite N2.52 trillion in OMO debits and N748.64 billion in Federal Government bond debits.
The liquidity picture is set to remain substantial in the coming week, with another N3.36 trillion in OMO maturities due to enter the banking system, although fresh CBN OMO issuance could absorb part of the inflow.
The latest figures point to a market where liquidity remains plentiful even as the cost of overnight funds moves in the opposite direction.
The overnight rate rose nine basis points week-on-week to 22.2 per cent. More recent market data from September 18 put the rate at 22.24 per cent, while system liquidity stood at N2.86 trillion, suggesting that the distribution of available funds remained uneven across market participants.
Investors keep buying government paper
The strongest signal from the fixed-income market came from continued demand for government securities.
Average Treasury bill yields across instruments declined by five basis points to 19.1 per cent, while OMO bill yields fell 16 basis points to 20.2 per cent.
The move followed strong demand at the CBN’s OMO auction, where investors submitted N3.03 trillion in bids against N1 trillion offered. The CBN allotted N2.52 trillion, with stop rates of 19.25 per cent for the 69-day bill, 19.05 per cent for the 90-day bill and 18.39 per cent for the 153-day bill.
Unmet demand subsequently moved into the secondary market, reinforcing buying pressure on short-term government paper.
The Treasury bill market is therefore entering the new week with a bullish undertone, even as investors prepare for another supply event. The Debt Management Office (DMO) is scheduled to offer N500 billion in Treasury bills on Wednesday, September 23.
The recent pattern also extends beyond the secondary market. At the September 9 NTB auction, the 364-day bill attracted N2.537 trillion in bids against a N500 billion offer, while its stop rate fell for the third consecutive auction to 16.62 per cent.
That sequence has become an important signal for the direction of short-term interest rates ahead of the MPC meeting.
Foreign investors get a new route into naira bonds
The bond market now has an additional catalyst that was not present in previous weeks.
J.P. Morgan has included Nigeria in its Government Bond Index Emerging Markets Edge, assigning Nigerian securities a 7.4 per cent weighting in the benchmark.
The index covers 16 eligible Nigerian government securities worth about $17.47 billion, with an average yield to maturity of 17.1 per cent and an average duration of 3.38 years.
The development is significant for the local debt market as it creates another avenue through which global investors tracking the index can gain exposure to naira-denominated government securities.
It does not amount to Nigeria’s return to J.P. Morgan’s flagship GBI-EM Global Diversified index, as the GBI-EM Edge is a separate frontier-market benchmark.
Still, the inclusion comes at a time when Nigerian government securities offer relatively high yields, potentially strengthening the appeal of local debt to international investors.
Bond yields already responding to demand
The FGN bond market also recorded buying interest during the week, with average yields falling 11 basis points to 16.6 per cent.
The decline followed strong demand at the September 14 bond auction, where investors submitted N1.49 trillion in bids against N1 trillion offered.
The June 2038 bond attracted N947.83 billion in subscriptions, while the newly issued September 2036 bond received N546.90 billion in bids. The market allotment amounted to N748.64 billion.
The benchmark curve was mixed. Yields increased at the short and middle segments on selling pressure in the March 2027 and June 2033 bonds, while the long end rallied on demand for the April 2049 bond.
The September 2036 bond cleared at 16.79 per cent, while the June 2038 bond cleared at 16.85 per cent.
With J.P. Morgan’s index inclusion now providing an additional potential source of offshore demand, the direction of bond yields in the weeks ahead will depend increasingly on how foreign participation interacts with the large domestic liquidity pool.
Naira remains relatively contained
The currency market was less dramatic during the week under reviews with the naira weakening 0.4 per cent to N1,332.14/$, as domestic demand for foreign exchange offset inflows associated with the OMO auction.
Gross external reserves, however, increased by $207.49 million to $54.69 billion as of September 18.
The forward market also priced in gradual depreciation, with the one-month contract at N1,351.86/$, the three-month contract at N1,388.73/$, the six-month contract at N1,441.06/$ and the one-year contract at N1,544.95/$.
More recent market data put the naira at around N1,330/$ on September 17, with Proshare reporting that the official-parallel market gap had narrowed to about 3.4 per cent.
MPC now becomes the market’s next test
All of these developments converge on the 307th MPC meeting scheduled for September 21 and 22. The CBN left the Monetary Policy Rate at 26.5 per cent at its July meeting, while the Committee said inflation was expected to moderate further amid exchange-rate stability and improving food supply conditions.
The projection is already manifesting as Nigeria’s headline inflation moderated to 15.39 per cent in August, as per the monthly Consumer Purchasing Index (CPI) data by the National Bureau of Statistic (NBS).
The September decision will therefore come at a point when the market has already been sending signals through falling Treasury bill stop rates, strong demand at government auctions, improving external reserves and renewed international access to naira bonds.
For investors, the immediate question is no longer simply whether liquidity is available. It is where that liquidity will go next.
With N3.36 trillion in OMO maturities due, another N500 billion Treasury bill offer scheduled and global index exposure opening a fresh channel for Nigerian bonds, the coming week could provide a clearer indication of whether the recent compression in fixed-income yields represents a temporary positioning move or the beginning of a broader repricing of Nigerian government securities.
