Fixed-income yields remain elevated despite the September reset of Nigeria’s benchmark interest rate to 23%
Nigerian banks can still earn yields above 17% on some Central Bank of Nigeria (CBN) and government securities, even after the regulator reset its benchmark interest rate from 26.5% to 23% in September, highlighting the gap between monetary policy adjustments and actual returns in the financial market.
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The latest figures show that yields on Open Market Operations (OMO) bills and federal government bonds remain elevated, while banks continue to earn 20% on surplus funds placed overnight with the CBN under its Standing Deposit Facility (SDF).
The persistence of these returns could help cushion bank investment income as the financial system adjusts to the 350-basis-point policy reset. However, the effect on individual banks will depend on their mix of loans and securities, funding costs, credit quality and how quickly existing assets reprice.
OMO Yields Rise After September’s Rate Reset
The CBN sold ₦2.628 trillion in OMO bills at its October 22 auction, exceeding its initial offer of ₦2 trillion by approximately ₦629 billion.
The 138-day bill cleared at 17.63%, while the 180-day instrument cleared at 17.14%. Both yields were higher than those recorded at the October 6 auction, when comparable 147-day and 182-day bills cleared at 17.22% and 16.92%, respectively.
The movement suggests that the decline in fixed-income yields following September’s policy adjustment has not continued in a straight line.
OMO securities provide eligible investors, including banks, with an avenue to earn returns on available funds. Their yields reflect market conditions, investor demand and liquidity management, rather than moving automatically in line with the Monetary Policy Rate (MPR).
The October auction does not establish a new upward rate cycle, but it shows that the policy reset has not immediately pushed all short-term market yields substantially lower.
Banks Still Earn 20% on Surplus Funds
The CBN’s Standing Deposit Facility continues to offer banks a 20% return on eligible surplus funds deposited overnight.
Banks reportedly placed about ₦8.85 trillion at the facility, while banking-system liquidity stood at approximately ₦7.26 trillion. The Nigerian Overnight Financing Rate remained around 20%, reflecting the continued importance of the CBN’s liquidity-management framework.
Although the SDF return is lower than the approximately 22% available under the previous policy corridor, a 20% overnight rate remains substantial.
This helps explain why the 350-basis-point reset in the benchmark rate has not translated into an equivalent decline across all the returns available to banks.
The CBN retained the Cash Reserve Requirement for deposit money banks at 45%, meaning banks must continue to hold a significant proportion of eligible deposits as reserves. The combination of reserve requirements, liquidity conditions and the rates offered on available instruments influences how banks deploy their funds.
Government Bond Yields Also Remain Elevated
Government bonds are providing another source of relatively high fixed-income returns.
Nigeria’s benchmark 10-year bond yield rose to 17.05% in the week ended October 16. At the October 19 bond auction, the September 2036 and June 2038 bonds cleared at 17.29% and 17.19%, respectively.
These yields indicate that longer-term government borrowing costs have remained high despite the reduction in the MPR.
For banks holding government securities, the returns available on new investments and the income earned from existing holdings will depend on the instruments’ maturities, purchase prices and terms. Higher market yields can also reduce the market value of previously issued fixed-rate bonds, so elevated yields do not automatically translate into gains for every bank holding securities.
The distinction matters when assessing bank earnings: interest income, trading gains or losses and the market valuation of investment portfolios can respond differently to changes in yields.
Why the Rate Reset Has Not Cut Bank Earnings Immediately
The CBN’s September decision was described as an operational reset intended to strengthen the transmission of monetary policy, rather than a change in its underlying policy stance. The adjustment followed a divergence between the benchmark rate and prevailing market rates.
The impact on bank earnings is also unlikely to appear immediately because existing loans and securities continue to earn their agreed returns until maturity or repricing.
Banks may face lower returns when they issue new loans or reinvest in securities at reduced yields. However, the pressure could be partly offset if funding costs fall, loan demand improves or borrowers become less likely to default as financing conditions ease.
The balance between these factors will differ across banks. Institutions that rely heavily on government securities may experience a different earnings effect from those generating a larger share of income through lending and other interest-earning assets.
Lower Rates Could Support Lending and Credit Quality
A lower-rate environment could eventually make borrowing more affordable for businesses and households, provided banks pass on the adjustment to customers.
In September, analysts noted that the effect of the CBN’s reset would depend partly on how quickly lending rates adjust. Lower borrowing costs could support credit demand, improve borrowers’ cash flow and reduce pressure on loan repayments.
For banks, these potential benefits must be weighed against the possibility that income from new loans and securities will decline. Net interest margin the difference between the income earned on interest-bearing assets and the cost of funding them will be an important measure of how well each institution manages the transition.
The impact on lending to property developers and homebuyers will also depend on banks’ credit policies, borrower risk assessments and the cost of funding mortgages. The MPR reset alone does not guarantee lower mortgage rates or wider access to housing finance.
Bank Investors Await a Clearer Earnings Picture
The full impact of the September policy reset is unlikely to be visible in the nine-month results alone, making full-year 2026 and 2027 performance important periods for assessing how banks adapt.
Investors will need to monitor interest income from loans and securities, funding costs, net interest margins, non-performing loans and dividend capacity.
Some banks have already shown differences in their reliance on investment securities as a source of interest income. Those differences mean the effect of changing market yields will not be uniform across the sector.
For now, yields above 17% on selected OMO bills and government bonds provide support for returns on some fixed-income assets. But the broader earnings outlook will depend on whether banks can maintain attractive returns while adapting to changing rates, funding conditions and credit demand.
The key question is not simply whether the CBN has lowered its benchmark rate, but how quickly the reset changes the rates banks pay, the returns they earn and the cost of borrowing across the economy.
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