By 
In August, Nigerian deposit money banks (DMBs) found themselves net borrowers from the central bank, with the total amount reaching a staggering N1 trillion. This development is a result of liquidity pressures and concerns surrounding the rising level of non-performing loans in the sector.
Cash-strapped local banks increasingly relied on the central bank’s standing lending facility to bolster their liquidity positions, resulting in fluctuating money market rates.
Surprisingly, the money market rates briefly dropped to single-digit levels in August, attributed to solid liquidity levels stemming from improved federal account allocation inflows.
In their commentary, CardinalStone Research pointed out that liquidity constraints contributed to an uptick in fixed-income yields last month. They noted that these liquidity challenges were evident in the domestic fixed-income market, leading to heightened activity at the CBN discounting window and ultimately driving DMBs’ net borrowing to N1.0 trillion.
The material reduction in liquidity also affected the July bond auction, with bid-to-offer clicking at 0.64x, the lowest level in nearly a year. Average stop rates increased by 135 basis points as a result, leading to a 96bps increase in the average bond yield in the secondary market during the review month.
Additionally, yields in the Nigerian Treasury Bills (NTB) market rose by 14 basis points due to strained system liquidity and reactions to the first Open Market Operation (OMO) mop-up since December 2022. The 1-year OMO instrument’s stop rate settled at 14.5%, further contributing to bearish market sentiment.
CardinalStone Research projected that after the support from the Federal Account Allocation Committee (FAAC) at the beginning of September, liquidity would likely remain constrained for the rest of the month due to the modest maturity profile. They anticipated the rollover of Nigerian Treasury bills maturities worth N527.2 billion and the absorption of bond coupon payments amounting to N352.2 billion by the September bond auction.
The combination of lower liquidity and the continued hawkish stance of the Monetary Policy Committee (MPC) is expected to drive higher yields, according to the investment firm. However, they acknowledged potential upside risks, including the possibility of less aggressive fiscal borrowing in line with the new Minister for Finance’s approach to additional debt and the impact of the naira devaluation on dollar earnings, supported by expected subsidy savings.
It’s worth noting that the Debt Management Office (DMO) has already raised approximately N4.6 trillion in bonds this year and issued net NTBs worth N330.0 billion, representing approximately 70.0% of the domestic borrowing target for the year.
Comments