Banks Dump CBN Special Bills to Ease Funding Pressure

Central Bank of Nigeria’s (CBN) Special bills were heavily traded as Nigerian banks sold off a sizeable chunk of their portfolios to the secondary market to ease funding pressure.

Market reports show that the CBN special bill gained 53 basis points to close the week at 9.7% while the financial system liquidity position remains weak amidst lower inflow from open market operation bills.

The financial system liquidity recorded mixed outing this week. Nigeria’s deposit money banks have been accessing funding at the CBN standing lending facility (SLF) in order to close their liquidity gaps.

On Friday, interbank rates faced with significant presssure as the Open Buy Back (OBB) and Overnight (O/N) rates increased by 5.33% points and 5.68% points to 22.33% and 22.93% respectively.

Compare with last week, the overnight rate expanded by 768 basis points to 22.9%, as debits for cash reserve ratio, Treasury Bill net issuances of N79.22 billion, and CBN’s weekly auctions outweighed inflows from open market operation (OMO) maturities valued at N80.00 billion.

“In the coming week, we expect the OVN rate to temper from current levels but remain elevated, as expected inflows from OMO maturities (N46.00 billion) may not be sufficient to offset funding pressures for the week”, Cordros Capital said.

Meanwhile, trading activities in the Treasury bills secondary market turned bullish this week following demand for the mid and long-dated OMO bills. Cordros analysts attribute this to the increased liquidity in the interbank market on Wednesday. Consequently, average yields across all instruments contracted by 13bps to 8.2%.

Across the market segments, the average yield at the OMO segment declined by 33bps to 9.7%. In contrast, average yields at the NTB segment sustained a bearish run and expanded by 10bps to 6.4%.

At the primary market auction (PMA), the CBN offered bills worth N91.27 billion with allotments of N5.06 billion of the 91-Day, N10.09 billion of the 182-Day and NGN164.11 billion of the 364-Day – at respective stop rates of 2.50% (previously 2.50%), 3.50% (previously 3.50%), and 9.64% (previously 9.65%).

Also, the CBN sold N20.00 billion worth of bills to market participants at this week’s OMO auction and maintained stop rates across the three tenors, as with previous auctions.

“We still maintain our view of higher average yields on T-bills, considering the expected dearth in system liquidity”, analysts said. Meanwhile, bearish sentiments returned to the bonds market as investors’ demand weakened following sustained expectations of higher yields.

Specifically, average yields expanded by 6bps to 12.3%. Across the benchmark curve, average yield expanded at the short (+4bps), mid (+10bps) and long (+1bp) segments following sell-offs of the JAN-2026 (+24bps), NOV-2029 (+20bps) and JUL-2045 (+30bps) bonds, respectively.

In the coming week, analysts at Cordros Capital said they expect the release of the May 2021 consumer price index (CPI) forecasted to print at 18.01% to shape market sentiments and the direction of yields.

“In the longer term, we maintain our expectations for higher yields, as institutional investors’ preference for higher-yielding short to mid-term instruments persists”, Cordros said.

In a related development, Nigeria’s FX reserves sustained a decline, dipping USD122.75 million week on week to USD34.05 billion – the lowest since November 2017. Meanwhile, the naira was flat at N410.80/USD and N502.00/USD at the Investors and Exporters Window (IEW) and parallel market, respectively.

At the IEW, total turnover decreased by 29.7% week to date to USD538.63 million, with trades consummated within the N400.00 – 420.77/USD band.

In the forwards market, the rate appreciated across the 1-month (up 0.1% to N413.33 to a dollar, 3-month jumped 0.2% to N419.51 per dollar, 6-month rose +0.2% to NGN428.36 per dollar and 1-year up 0.3% to N446.56 per dollar) contract.

“We expect improved liquidity in the IEW over the medium term, given the higher oil prices and an expected increase in crude oil production volume. Accordingly, we expect the naira to remain relatively range-bound at N410.00/USD – N415.00/USD at the IEW”, Cordros Capital said.