ond prices rise further as idle funds cross N600bn

By Babajide Komolafe
Buoyed by increasing idle funds in banks’ vault, which rose above N600 billion last week, the prices of FGN continued their upward trend with the top five bonds rising by an average of N4.26

According to data from the Financial Market Dealers Association of Nigeria (FMDA), the highest gainer for the week was 4th FGN Bond series 11 which rose by N9.74 to N122 from N112.26. 4th FGN Bond series 9 came second with N3.99, rising to N116.93 from N112.94. 4th FGN Bond series 11 came third  N3.38 price increase, from N111.5 to N114.88.

The third and fourth positions went to 6th FGN series 3 and 6th FGN series 4, which rose by 3.11 and N2.94 respectively. Series 3 rose to N143.74 from N140.63, while Series 4 rose to N101.55 from N98.6.

Bond prices have been rising since the Central Bank intervention in eight banks last year, driven by idle funds in the interbank money market.

Reflecting this trend, the prices of the top five bonds above have risen by an average of N11.766 from the first trading day of the year and Thursday last week.

Already, the persistent rise in bond prices is becoming a source of concern to money market operators. “The prices are already too high”, a senior treasurer told Vanguard. “Though the prices would continue to rise, we expect the rate of increase to be lower than in the past”, he said.

The rising trend of bond prices has fuelled fears in some quarters that bond market has become a bubble that would soon burst. Bond traders however dismissed such fears saying that there is no bubble in the market and there is no threat of imminent crash in bonds’ prices. “There is no possibility of decline in bond prices in the near future”, said a senior bank foreign exchange dealer.

Bond traders pointed out that with the extreme liquidity in the money market, there would always be strong demand for bonds.

Investigation revealed that the idle funds in banks’ vault rose above N600 billion last week reflecting the full impact of inflows from statutory allocation and excess crude account funds  which were in  excess of N600 billion. Prior to the inflow, idle funds in the banks was about N300 billion.

The idle funds according to treasurers are occasioned by the credit freeze in the banking industry and lack of good investment outlets.

Further investigation reveal that most banks have been giving their idle funds to the CBN as deposit through its Standing Deposit Facility (SDL) and in the process earn 2.0 per cent on their funds.

“The idle funds would not go down until banks start lending”, a treasurer told Vanguard. He said the banks would not lend until they are pushed to the wall. “Once the CBN reduces the interest rate on its deposit to zero per cent, banks would stop placing money with it and began to lend again”.