Funding Pressure Benign as Financial System Liquidity Drops

Funding Pressure Benign as Financial System Liquidity Drops

In the money market, funding pressure remain largely benign as financial system liquidity opened at N506 billioyesterday from N532 billion.

Consequently, the Overnight (OVN) and Open Buy Back (OBB) rates closed flat at 1.00% and 1.75% respectively.

Analysts at Chapel Hill said they expect the financial system to remain liquid, supported by Open Market Operations (OMO) maturities estimated at N300 billion.

However, analysts said funding pressures may resurface on Friday due to settlement of the Debt Management Office (DMO) bond auction, as well as provisioning for the retail FX auction.

Despite the surprising rate cut by the Monetary Policy Committee (MPC) , the market traded with caution as bid-ask spread widened, mainly due to the bond Primary Market Auction (PMA) underway.Funding Pressure Benign as Financial System Liquidity Drops

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At the front end of the curve, analysts said discount rates on benchmark Nigerian Treasury Bills (NTBs) closed flat at an average of 1.74%, but the benchmark OMO curve compressed by 8bps to 1.88%.

In the bond market, investors’ showed some interests in selected intermediate and long maturities amid wide bid-ask spread, which helped pull the benchmark curve lower by an average of 7bps to 7.21%.

As expected, the bond PMA was well bid and marginal rates cleared substantially lower, thanks to surplus liquidity in the financial system, the surprising dovish outcome of the MPC meeting, and DMO’s willingness to allot a lower amount.

Although the DMO offered N145 billion at the auction, subscription was strong at N365.23 billion, implying a bid-cover ratio of 2.5x (1.6x at the August auction).

However, analysts at Chapel Hill Denham explained that DMO took a passive stance to ensure lower stop rates at the auction.

As a result, the DMO allotted N103.81 billion at the auction while marginal rates compressed by an average of 84bps to 8.09%.

The DMO sold N66.97bn of JAN-26 at 6.00% (-70bps), N25.43bn of MAR-35 at 8.52% (-83bps), N6.81bn of JUL-45 at 8.90% (-85bps), and N4.6bn of MAR-50 at 8.94% (-96bps).

Funding Pressure Benign as Financial System Liquidity Drops