Investors Lock in Yields as CBN Rate Reset Drives Market Rates Down

Investors are moving into longer dated fixed income securities to lock in prevailing returns as the Central Bank of Nigeria’s (CBN) 350 basis point interest rate cut triggered a broad decline in market yields.

The Financial Markets Dealers Association (FMDA) said the development reflected growing expectations that interest rates could moderate further, prompting investors to secure current yields before another round of repricing across the fixed income market.

At the recent Treasury bills auction, demand was strongest for the 364-day instrument, which recorded a bid to cover ratio of 13.65 times, indicating significant appetite for longer dated securities.

“This reflects strong investor appetite to lock in longer dated yields following the MPR reset,” the FMDA said, adding that the relatively weaker demand at the shorter end showed “a clear rotation toward longer dated instruments as market participants adjust to a lower rate environment.”

The shift followed the decision of the Monetary Policy Committee (MPC) to cut the Monetary Policy Rate (MPR) by 350 basis points from 26.5 per cent to 23 per cent. The rate adjustment has since filtered through the money and fixed income markets, with yields falling across Treasury bills, Open Market Operations (OMO) instruments and government bonds.

Average Treasury bill yields declined by 96 basis points from 18.77 per cent on September 18 to 17.81 per cent on September 25, while average OMO yields fell by 129 basis points from 19.80 per cent to 18.51 per cent.

The overnight funding market has also responded, with the Nigerian Overnight Financing Rate (NOFR) falling from about 22 per cent before the MPC meeting to around 20 per cent afterwards. The movement brings the overnight funding rate closer to the new 23 per cent MPR, narrowing the gap between the CBN’s policy benchmark and prevailing money market rates.

“The recent decision to reset the Monetary Policy Rate (MPR) to 23 per cent from 26.5 per cent marks more than a shift in policy stance,” FMDA said, adding that it “signals the beginning of a restoration in monetary policy transmission across financial markets.”

The repricing has been more pronounced in the bond market, particularly at the longer end of the yield curve. Average bond yields declined from 16.5 per cent to 16 per cent between September 18 and 25. However, the 15-year bond recorded a much sharper 195 basis point fall, with its yield dropping from 16.35 per cent to 14.40 per cent.

Similarly, the yield on the 30-year bond declined by 76 basis points from 15.29 per cent to 14.53 per cent. The sharp decline in long term yields means investors holding longer duration securities are recording significant valuation gains as market expectations adjust to the lower interest rate environment.

“This reinforces the typical pattern in an easing environment, where long term bondholders benefit more from valuation gains due to higher duration sensitivity,” the FMDA said, noting that the movement in yields across the money and bond markets was evidence that the CBN’s rate decision was beginning to feed into financial market pricing.

“Taken together, these developments point to a critical shift in Nigeria’s monetary framework,” it said. The FMDA noted that the alignment between the MPR and market benchmarks was gradually influencing pricing across interbank funding and government securities.

“In this sense, the recent rate reset is not just about easing financial conditions, it is about restoring credibility to the policy transmission mechanism itself,” it said.