Bond yields fall, naira eases on black market on rate cut

Yields on Nigeria’s bonds fell below 10 percent across maturities as trading started on Wednesday, traders said, a day after the central bank announced a surprise interest rate cut aimed to stimulate lending in Africa’s biggest economy.

Nigeria’s central bank cut benchmark interest rate to 11 percent from 13 percent on Tuesday, its first reduction in the cost of borrowing in more than six years. The continent’s top oil producer has been hard hit by a plunge in crude prices over the last year.

The rate cut also weakened the naira currency on the unofficial market, down 0.8 percent to 242 against the dollar, one trader said.

“We expect bond yields to decline further in the secondary market,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank.

The yield on the benchmark 20-year bond fell the most to a five-year low, dropping 230 basis points in early trades to 10 percent, traders said.

Bond yields had traded above 11 percent across maturities prior to the rate decision on Tuesday, with the 2034 bond trading at 12.30 percent.

Gadio said bond holders could be exposed to future losses if the interest rate easing cycle was reversed with inflation currently trading 9.3 percent below the yields..

The bank also reduced the cash reserve ratio for commercial banks to 20 percent from 25 percent, another move to try to inject liquidity into the banking system and encourage lending.

The central bank has been injecting cash into the banking system since October in a bid to help the economy.