‘Why CBN mopped up N12.14trn cash in September’
Investors’ appetite for Open Market Operations (OMO) bills remained strong in September despite declining yields, with experts attributing the trend to relatively high returns, naira stability, broader market participation and excess liquidity in the financial system.
Daily Trust reports that OMO is a tool used by a central bank to control the supply of money in the economy.
When the CBN wants to withdraw excess money from the financial system, it sells OMO bills to investors and the money used for the purchase is effectively removed from circulation for the duration of the investment.
The CBN is both the issuer of OMO bills and the institution that uses them as a monetary policy tool. This distinguishes OMO from Treasury bills, even though they may appear similar to an ordinary investor.
The Central Bank of Nigeria (CBN) received N12.14 trillion in subscriptions across two OMO auctions held on September 24 and 29, against N3.4 trillion offered, according to analysis of the auction results.
The apex bank ultimately allotted about N6.94 trillion, meaning subscriptions were about 3.57 times the amount offered, while allotments exceeded the initial offer by more than twofold.
The strong demand came after the Monetary Policy Committee (MPC) cut the Monetary Policy Rate (MPR) by 350 basis points to 23 per cent, while the CBN intensified liquidity management through OMO sales.
At the September 24 auction, the CBN offered N900 billion through 152-day and 180-day instruments but received N5.741 trillion in bids.
Five days later, investors submitted another N6.399 trillion against N2.5 trillion offered across 147-day, 182-day and newly introduced 266-day securities.
Despite the heavy subscriptions, yields continued to moderate. The 180-day instrument attracted N3.883 trillion against N450 billion offered on September 24, representing about 8.63 times the offer.
On September 29, the 266-day instrument attracted N4.543 trillion, accounting for about 71 per cent of total subscriptions that day, with N2.996 trillion allotted.
The 152-day and 180-day instruments cleared at 17.29 per cent and 16.99 per cent respectively, while the comparable 147-day and 182-day bills cleared five basis points lower at 17.24 per cent and 16.94 per cent.
The 266-day instrument cleared at 16.23 per cent, although CBN-reported true yields across the September 29 instruments remained closely grouped between 18.4072 per cent and 18.5263 per cent.
…Excess liquidity, investor appetite
Strong demand for Open Market Operations (OMO) bills reflects the high level of liquidity in Nigeria’s financial system as well as growing investor appetite for the country’s financial assets, according to Ayokunle Olubunmi, Head of Financial Institutions’ Rating at Agusto and Co.
Olubunmi said the expansion of participation in the OMO market was one of the key factors driving demand for the securities.
According to him, the CBN had previously restricted participation largely to banks, but the opening of the market to a broader range of investors had increased the number of participants seeking OMO bills.
“When you have it open to a lot of people, you will see more people actually demanding it,” he said.
He identified the substantial liquidity still circulating in the economy as another major factor. Olubunmi noted that funds associated with the Federal Government’s previous Ways and Means financing had entered the economy, contributing to the pool of liquidity that the CBN is now seeking to absorb.
He explained that the CBN’s active liquidity-management operations were therefore contributing to increased demand for OMO securities, as investors sought opportunities to deploy available funds.
Olubunmi also pointed to improving macroeconomic conditions as an additional driver, saying more foreign investors were beginning to look at Nigeria and participate in its financial markets.
According to him, the high demand for OMO bills is broadly positive for the financial system because the securities provide the CBN with an effective tool for managing excess liquidity.
“OMO is just a way of trying to manage the amount of liquidity in the system,” he said, adding that when excess liquidity builds up, the CBN can use OMO operations to absorb funds and reduce potential adverse effects on the financial system.
He said the strong demand also demonstrates that significant liquidity remains available within the financial system, creating opportunities for businesses and investors with viable strategies and projects to access funding.
‘Election factor’
Looking ahead, Olubunmi expects liquidity management to remain prominent in the coming months, particularly as Nigeria approaches the election period.
He noted that the CBN had maintained a tightening stance and indicated that it was not yet ready to ease monetary policy through reductions in the Monetary Policy Rate.
As election-related spending and economic activity increase, he said, the central bank could continue using OMO bills and other instruments to mop up excess liquidity and maintain stability in the financial system.
David Adonri, Chief Executive Officer of Highcap Securities Limited, said the resilience of demand reflected the continued attractiveness of Nigerian fixed-income assets, particularly when compared with returns available in other markets.
He said OMO yields of 17 per cent and above remained attractive to domestic and foreign investors despite the reduction in the MPR.
“OMO rate may not align fully with the MPR because the OMO rate is market determined by what the buyers or sellers in the market decide,” Adonri said.
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