Following its ongoing monetary policy tightening, the Central Bank of Nigeria (CBN) repriced Treasury notes at higher spot rates during its midweek primary market auction. The CBN offered instruments worth N264.33 billion for subscription during the auction. The whole amount was divided as follows: N1.74 billion for the 91-day bills, N1.26 billion for the 182-day bills, and N261.33 billion for the 365-day bills.
The auction received N398.17 billion in total subscriptions. Local investors’ entire subscription for Nigerian Treasury notes was skewed toward the longer-dated bill worth N383.88 billion, accounting for 96.4% of the total subscription.
Noticing altering market dynamics, the apex bank increased 364-day bill spot rates to 12.15% last week, a 6.21% increase after it announced a 25 basis point interest rate hike to 18.75%. As a result, investors in the secondary market reacted with selloffs, driving the average yield higher after a protracted wait for new yield repricing as the naira asset remains vulnerable to inflationary pressures.
At the end of the week, the average yield on Nigerian Treasury notes had risen to 7.35%, backed by another monetary policy tightening. Cordros Capital Limited’s fixed income dealers attribute this week’s result to dwindling interest in bills as market participants took gains on some holdings.
Remember that the CBN’s monetary policy committee raised the benchmark interest rate to 18.75% in an effort to combat Nigeria’s increasing inflation rate. Considered ineffectual for a cost-push inflation upswing, the top bank has raised the monetary policy rate by 725 basis points cumulatively since the first quarter of 2022, when it was 11.50%.
The market experienced selloffs of Nigerian Treasury notes, headed by deposit money institutions attempting to boost their liquidity holdings, in order to optimize profits on their various portfolios. In the absence of major inflows from matured bills, the financial sector experienced a return of liquidity concerns last week, driving short-term benchmark interest rates higher. However, substantial inflows reversed the liquidity strain.
Data from FMDQ showed that the overnight rate contracted by 19.6% to 1.4% week on week, as the system liquidity was supported by inflows from Federal Account Allocation Committee (FAAC) disbursement worth N561.49 billion and FGN bond coupon payments totaled N126.00 billion. As of Friday, the average system liquidity closed higher at a net long position of N363.38 billion as against a net long position of N103.19 billion in the prior week.
.” We expect the liquidity in the system to remain buoyant next week, barring any significant outflows. Hence, we believe the overnight rate will remain depressed”, Cordros Capital told investors in an update. MarketForces Africa reported that the CBN refinanced N264.33 billion worth of treasury bills, fully offsetting the matured instruments. Demand came higher amidst a dearth of investment options, though rising inflation has drastically reduced real return on investment.
The CBN’s primary market auction results showed that stop rates for 91-day bills were priced at 6%, representing 314 basis points increase from the previous auction sales. Also, CBN sold 182-day bills at 8%, translating to a 450 basis points surge while 364-day bills rose to 12.15%, 621 basis points above 5.94% offered to investors in the previous week
“This rate adjustment aligns with the apex bank’s aim to curtail inflation by maintaining high-interest rates, as reflected in the recent 25 basis point hike in the Monetary Policy Rate (MPR)”, Cowry Asset Management told investors in its market update.
Consequently, the secondary market saw bearish activity as traders followed the direction of the primary market rates. Meanwhile, activities in the OMO space were muted amid zero maturing or refinanced bills. However, inflows from the Federation Account Allocation Committee (FAAC) contributed to a decrease in Nigeria Interbank Offered Rates for all tenor buckets, according to Cowry Asset Management.
