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Debut Sale of Special Nigerian Bonds Disappoints Investors

Average yields on federal government bonds across the short and long tenor of the curve widened by 2 and 16 basis points respectively.

Nigeria’s first issuance of special bills created to boost liquidity for the nation’s banks left investors disappointed after yields on longer-dated debt securities surged.

The central bank offered about 4.1 trillion naira ($10.5 billion) of 81-day special bills to lenders in the form of promissory notes at 0.5% on Thursday, according to Chapel Hill Denham Securities. That’s much better than the zero interest the banks usually get for parking excess cash with the regulator.

But, a day earlier, the central bank sold 38.7 billion naira of one-year Treasury bills at a yield 3.2% — more than 20 times higher than the rate from the previous auction. By doing so, the special bonds were effectively out-priced for those wanting to trade them on the secondary market.

“There is no point in buying it — it’s way lower than one-year T-bills,” said Adetayo Adeyi, a portfolio manager at Asset Resource Management. “Clearly no institutional investor will go and buy it.”

Nigeria’s central bank introduced the bills to better manage liquidity, while increasing the amount of capital deposit-taking institutions can use to extend credit to critical sectors. This measure, combined with other monetary policy tools, is expected to help Africa’s biggest oil producer exit its second recession in four years by early 2021, according to Governor Godwin Emefiele.

The frequency of auctions will depend on how much surplus cash banks are generating, Adeyi said.

Ayodeji Ebo, head of research and strategy at Greenwich Merchant Bank in Lagos, doesn’t expect the central bank to hold another auction of the special bills soon, given the size of the debut offering.

“Even if if they do another, it will be very small,” said Omotola Abimbola, an analyst at Lagos-based Chapel Hill Denham.

Average yields on federal government bonds across the short and long tenor of the curve widened by 2 and 16 basis points respectively, FSDH Capital said in note to clients late Thursday.

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The higher T-bills rate signals the regulator is trying to normalize interest rates, said Adeyi of Asset Resource Management.

The results of the bond auction that closes next week will set a new tone for the fixed-income market, she said. “Right now, people are protecting their bids” and bearish sentiment is expected to persist until there is clarity

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