Money Market Rates Slump as CBN Ignores Excess Liquidity

Money Market Rates Slump as CBN Ignores Excess Liquidity

Buying interest spiked in the Nigerian Treasury bills’ secondary market amidst robust liquidity levels in the financial system. The sustained healthy liquidity in the market was a result of the apex bank’s refusal to mop up excess liquidity via open market operation.

Data showed that money market rates maintain a downward trend midweek. The open report settled at 0.83% and the Overnight lending rate printed at 1.15% in the absence of funding pressures in the financial system.

Analysts attribute downward short-term benchmark rates to the robust liquidity profile; primarily supported by the CBN’s decision to return to an ‘equitable’ cash reserve ratio from its previous debiting regime. FAAC and matured OMO Bills that the CBN failed to refinance.

As a result, cash-rich deposit money banks now have enough liquidity to play with in the fixed income market; a development that comes in contrast to dictate under the suspended Central Bank of Nigeria (CBN) Governor Godwin Emefiele – with unorthodox touches in liquidity management.

Earlier in the year, banks were offloading Treasury bills holdings to ensure they meet their liquidity target due to arbitrary debiting for failing to meet the loan-to-deposit ratio. Now, the trend has reversed, causing the benchmark yield to move slowly while the interest yield on naira assets remains negative.  

On Wednesday, the average secondary market yield on T-bills moderated 8 basis points to 6.25%. At the last auction, the apex bank also crashed spot rates on Treasury bills worth N187 billion that were refinanced despite rising interest and inflation rates in the country.

Notwithstanding a narrow gap between inflation and interest rate, real investment return has remained negative in the current year, though investors seek yield re-pricing, liquidity position has become a key market factor amidst expectation of improved FAAC disbursements.

In the fixed income market generally, asset/fund managers have been taking positions in government securities with other institutional investors while local banks’ investment continues to surge.

In the money market, short-term benchmark rates declined further in the absence of funding pressures. The open repo declined 31 basis points to 0.83% from 1.14% in the previous day. Also, the overnight lending rate declined by 42 basis points to 1.15% from 1.57% at the same time.

Across the curve, traders said the average yield closed flat at the short and mid segments but contracted at the end of the long (-13bps), following buying interest in the 246-day to maturity (-102bps) bill.

In June, the monetary authority appears to have discontinued open market operation (OMO bills) operations to absorb excess liquidity despite the fact that it restored an equitable CRR regime. This will keep market rates lower and the yield curve tight, analysts said.  #Money Market Rates Slump as CBN Ignores Excess Liquidity  Nigerian Treasury Bills Yield Rises to 7%