Nigeria’s financial system liquidity increased sharply last week, but government borrowing costs continued to climb as investors demanded higher returns on government securities, reflecting ongoing pressure in the fixed-income market.
System liquidity rose by 69.39 per cent week-on-week to ₦6.283 trillion from ₦3.709 trillion, supported mainly by matured Open Market Operations (OMO) bills and other repayments, according to the Financial Markets Dealers Association’s (FMDA) weekly market report.
Despite the increase in available funds, average yields on Federal Government of Nigeria (FGN) bonds climbed by 32 basis points to 16.43 per cent in the week ended October 16. Average Treasury bill yields also increased by seven basis points to 18.23 per cent.
The trend indicates that the additional liquidity has not yet translated into lower government borrowing costs, as investors continue to seek better returns on their investments.
Bond Yields Rise Across Selected Maturities
Pressure was particularly strong on shorter-dated government bonds.
“The pressure was particularly pronounced at the short end of the bond market. Two-year FGN bond yields jumped 142 basis points to 17.50 percent, while seven-year yields rose 61 basis points to 17.04 percent and 10-year yields climbed 46 basis points to 17.05 percent.
“The 30-year bond was the exception, with its yield falling 60 basis points to 14.60 percent, while five-year and 15-year yields remained unchanged at 16.90 percent and 14.50 percent, respectively,” the report disclosed.
These movements show that the repricing varied across bond maturities, rather than affecting the entire market uniformly.
Treasury bills also recorded mixed performance. Average yields rose to 18.23 per cent from 18.16 per cent, while one-month and three-month yields increased by 79 basis points and 65 basis points, respectively.
In contrast, six-month yields declined by 101 basis points, while 12-month yields fell by 29 basis points.
DMO Rejects Most Treasury Bill Demand
The Debt Management Office’s (DMO) latest Treasury bill auction highlighted the gap between investors’ return expectations and the government’s borrowing strategy.
At the October 14 auction, the DMO allotted ₦269.06 billion against a reduced offer of ₦450 billion, down from the previous offer of ₦900 billion.
The agency rejected most of the demand for the 364-day Treasury bill, while the stop rate on the one-year instrument increased by five basis points to 15.90 per cent. This marked the first increase in the rate since August.
The stop rates for the 91-day and 182-day bills remained unchanged at 15.50 per cent and 15.80 per cent, respectively.
The lower allotment suggests that the DMO was unwilling to accept all bids at the rates investors demanded, even as buyers continued seeking returns that reflected prevailing market conditions.
More Liquidity Expected as Government Borrowing Continues
Nigeria’s financial system is expected to receive additional liquidity, although government borrowing could absorb part of the incoming funds.
The FMDA projected ₦2.858 trillion in inflows for the week beginning October 19. These include ₦2.067 trillion from OMO maturities, ₦392.792 billion from Treasury bill maturities and ₦349.838 billion in FGN bond coupon payments.
Other expected inflows comprise ₦42.872 billion from commercial paper maturities and ₦5.25 billion in corporate bond coupons.
A ₦2.43 trillion Federation Account Allocation Committee (FAAC) disbursement to the federal, state and local governments could provide another boost to liquidity.
However, the DMO scheduled a ₦1.75 trillion FGN bond auction for October 19, reopening bonds maturing in February 2034, September 2036 and June 2038. The auction could absorb some of the funds entering the financial system.
Foreign Reserves Rise as Naira Weakens Slightly
Nigeria’s external position received some support from higher oil prices and a marginal increase in foreign reserves during the review period.
Gross external reserves rose by 0.02 per cent week-on-week to $55.089 billion, the highest level since December 2008, according to the FMDA.
Average Brent crude prices increased by 3.92 per cent to $106.02 per barrel, potentially supporting foreign exchange inflows from oil exports.
However, the naira weakened slightly in the official foreign exchange market, depreciating by 0.06 per cent to ₦1,332.31 per dollar in the Nigerian Foreign Exchange Market (NFEM). The parallel-market rate remained unchanged at ₦1,375 per dollar.
Trading activity in the NFEM interbank market also increased, with turnover rising by 14.08 per cent to $1.08 billion.
While higher oil prices and stronger reserves provide positive signals for Nigeria’s external position, the latest figures do not establish whether the reserve increase will be sustained.
For the domestic debt market, the key challenge remains whether rising liquidity can translate into lower borrowing costs. With investors demanding higher returns on selected government securities, the direction of bond yields will depend on market demand, government borrowing and how effectively incoming funds are absorbed.
