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Buying interest surged in the secondary market for Nigerian Treasury bills as liquidity levels remained strong in the financial system. The market’s sustained healthy liquidity was a result of the Central Bank of Nigeria (CBN) choosing not to mop up excess liquidity through open market operations.
Data indicates a continued downward trend in money market rates midweek. The open repo settled at 0.83%, while the overnight lending rate stood at 1.15% due to the absence of funding pressures in the financial system.
Analysts attribute the decline in short-term benchmark rates to the robust liquidity situation, primarily supported by the CBN’s decision to revert to an “equitable” cash reserve ratio, as opposed to its previous debiting approach. This change was driven by the failure to refinance FAAC and matured OMO Bills.
As a result, deposit money banks with substantial cash reserves now have ample liquidity to invest in the fixed income market. This marks a shift from the previous approach under the suspended CBN Governor Godwin Emefiele, which involved unorthodox liquidity management measures.
Earlier this year, banks were offloading Treasury bills holdings to meet their liquidity targets, as they faced arbitrary debiting for failing to meet the loan-to-deposit ratio. However, the trend has reversed, resulting in a gradual decrease in benchmark yields, while the interest yield on naira assets remains negative.
On Wednesday, the average secondary market yield on T-bills declined by 8 basis points to 6.25%. During the latest auction, the CBN also reduced spot rates on Treasury bills worth N187 billion, despite rising interest and inflation rates in the country.
Despite a narrow gap between inflation and interest rates, real investment returns have remained negative this year. While investors seek yield repricing, the liquidity position has become a key market factor, driven by expectations of improved FAAC disbursements.
In the overall fixed income market, asset/fund managers have been taking positions in government securities alongside other institutional investors, while local banks’ investments continue to rise.
In the money market, short-term benchmark rates further declined in the absence of funding pressures. The open repo decreased by 31 basis points to 0.83% from the previous day’s 1.14%. Similarly, the overnight lending rate declined by 42 basis points to 1.15% from 1.57%.
Traders reported that the average yield remained stable at the short and mid segments but contracted at the long end (-13bps) due to buying interest in the 246-day to maturity (-102bps) bill.
During June, the monetary authority seemed to have halted open market operations (OMO bills) aimed at absorbing excess liquidity, despite restoring an equitable cash reserve ratio. Analysts expect this to keep market rates lower and the yield curve narrow.
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