Hot Money: CBN Favours OMO Bills Investors with Higher Rates
The interest rate differential between Open Market Operations (OMO) and Nigerian Treasury bills has widened significantly, driven by the Central Bank of Nigeria’s (CBN) decisive actions to draw hot money into the economy.
Elevated returns on Nigeria’s short-term investment securities have attracted a steady stream of foreign portfolio inflows, supporting liquidity in the foreign exchange market and boosting demand for the naira.
Deposit money banks and foreign portfolio investors are the main eligible players at the OMO bills auction as the Apex Bank uses the instrument to target FX inflows into the market.
A review of auction results revealed that the CBN offered 19.35% for OMO bills investors with 99-day maturity and 15.95% for investors planning to hold Nigerian Treasury bills for 91 days.
“Dollar inflows that foreign portfolio investors convert into naira for financial instrument purchases are a hidden risk waiting for the right time to explode”, an expert said in a chat.
Fear of capital reversal has kept the Nigerian authorities from allowing a strong naira or reducing the spot interest rate on short-term borrowing instruments, amid much-touted improved macro conditions.
A recent dollar purchase by the Central Bank signals fears that a strong naira could prompt offshore investors to exit the Nigerian market.
Last week, the CBN demonstrated its commitment to keep liquidity in the money market in check to maintain its lower inflation target by mopping up about N1.02 trillion through OMO and Treasury bills auctions.
At the OMO bills auction, the CBN offered N600 billion across 8-day, 99-day, and 113-day bills. The auction recorded a moderate yet positive demand, with total subscriptions rising by 7.75% from the previous auction to reach N767.00 billion.
Despite strong demand, the allotment was limited to N81.00 billion, resulting in bid-to-cover and subscription-to-offer ratios of 0.14x and 1.28x, respectively, indicating a deliberate rejection of excess bids.
Investors received attractive rates of 19.35% for the 99-day bills and 19.69% for the 113-day bills, while the 8-day maturity saw no sales. In the Treasury bills auction, the CBN solidified its stance by offering N850.00 billion across all three maturities, a strategic downward adjustment from the previous auction’s N1.05 trillion.
Notably, total subscriptions soared to N2.78 trillion, with a remarkable concentration of interest in the 364-day bill, which attracted a staggering N2.57 trillion—accounting for 92.44% of total bids.
Ultimately, N933.92 billion in Treasury bills were allocated to investors, reflecting improved bid-to-cover and subscription-to-offer ratios of 1.10x and 3.27x, respectively, up from 0.93x and 2.23x at the last auction.
The rates offered were compelling as well: the 91-day bills priced at 15.95%, the 182-day bills at 16.65%, and the 364-day treasury bills at 16.72%. Nigeria’s Headline Inflation Projected at 13.48%
