The Central Bank of Nigeria’s 350-basis-point cut in its benchmark interest rate has sparked a major repricing at Wednesday's auction, with yields dropping across all three tenors as investors submitted N4.09 trillion in bids for the 364-day bill.
The 364-day Treasury bill cleared at a 15.89 percent stop rate, down from 16.62 percent at the previous auction, in spite of demand going past the N400 billion offered by more than 10 times.
“While markets anticipated lower yields, the 350bps MPR cut from 26.5 percent to 23 percent surprised investors and triggered further repricing,” said Adeniyi Adejumobi, assistant fixed-income fund manager at FCMB.
Adejumobi said money-market rates had already decreased to between 17 and 18 percent from about 20 percent, creating room for Treasury bill yields to adjust further following the policy rate reduction.
For the 182-day bill, investors bid N82.23 billion versus N100 billion on offer, while the CBN allotted N39.49 billion at a stop rate of 15.80% and a true yield of 17.16%.
The 91-day bill recorded N54.93 billion in subscriptions against N100 billion offered, with N11.03 billion allotted at a 15.50 percent stop rate and a 16.14 percent true yield.
Demand was significantly stronger at the longer end, with N4.09 trillion submitted for the 364-day bill against N400 billion offered. The CBN allotted N447.07 billion at a 15.89 percent stop rate, translating to a true yield of 18.89 percent.
The auction came a day after the Monetary Policy Committee cut the Monetary Policy Rate from 26.5 percent to 23 percent, its first major policy-rate reduction after a period of tight monetary conditions.
According to Victor Ogunfijo, head of fixed-income trading at CardinalStone, the rate cut marks the start of an easing cycle that should drive fixed-income yields lower.
“Consequently, yields on fixed income instruments will react ahead, moving lower in response to this 350bps cut,” he said.
Wednesday’s auction also revealed that investor appetite for longer-dated Treasury bills remains strong. At the previous auction, the 364-day bill attracted N2.54 trillion in subscriptions against N300 billion offered and cleared at 16.62 percent.
The surge in demand at Wednesday's auction was backed by high system liquidity of N6.90 trillion as of September 21, according to pre-auction market research. Analysts had anticipated that the MPR cut alongside the strong liquidity would lead to lower clearing yields.
Adejumobi said demand and liquidity would remain important in determining how quickly Treasury bill rates adjust, suggesting that the MPR cut alone would not determine the level at which bills trade.
The most recent auction provides an early indication of how the CBN’s new 23 percent policy rate is filtering into government short-term borrowing costs. For investors, however, the lower stop rates also mean that returns available on newly issued Treasury bills are beginning to moderate.