LAGOS: Nigeria's one-year treasury bill yield rose about a percentage point to 10 percent on Wednesday, continuing a rebound from the previous day's dive to 7 percent after the government said it would repay 198 billion naira of debt this month to cut its costs.
The one-year yield has been volatile recently, caught between local demand and foreign investors pulling money out of the country, all amid speculation about the outlook for official interest rates.
The government's debt office wants to see interest rates come down, but the central bank has kept its main rate at 14 percent for over a year now as it battles inflation and seeks to attract foreign investors to support the naira currency.
On Tuesday the debt office had announced plans to repay some treasury maturities instead of rolling them over, thereby slightly reducing its debt and debt-servicing costs.
Traders said some foreign investors were booking profits and bidding to repatriate their funds, creating a liquidity squeeze in the currency market - a shortage of dollars and a related weakening in the naira.
The sell-off in bills has led to a bottleneck in the investor forex market as foreign players are not bringing in new funds but are bidding to buy dollars, while banks are not willing to sell dollars for less than 360 naira each, traders said.
The sharp drop in treasury yields from a high of 18 percent earlier this year has triggered a switch by local funds to bonds, currently yielding about 13.5 percent on average, on expectations that interest rates might start to fall next year.
PREMATURE TO EASE?
"The market is unsure if the end of open market operations is a permanent change in policy," analysts at Stanbic IBTC said.
The central bank has been mopping up liquidity in the past to keep money supply tight and support the naira by attracting foreign inflows into the bond market in the wake of a currency crisis in Africa's biggest economy.
But that move pushed up borrowing costs, especially for the government, which is battling to contain a widening deficit and reduce its debt-servicing costs.
The central bank has been under pressure to cut interest rates currently at 14 percent to lower borrowing costs and stimulate growth. Traders said the bank has not offered open market bills in the past two weeks, leading to a rise in naira liquidity.
"It could well be premature to ease here given inflation remains sticky and extra liquidity represents an issue if it is trying to find an exit," Stanbic analysts wrote in a note.
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