Money Market Rates Spike as Banks Make Provision for FX Auction

Money Market Rates Spike as Banks Make Provision for FX Auction

Despite strong liquidity in the financial system worth more than a trillion naira, money market rates spike Friday as deposit money banks make provision for foreign exchange auction.

Market data indicated that financial system liquidity opened substantially higher at N1.3 trillion from N857 billion in the previous day.Money Market Rates Spike as Banks Make Provision for FX Auction

Nonetheless, money market rates spiked due to provisioning by deposit money banks (DMBs) for the retail foreign exchange auction and settlement of the October bond auction.

The Open Buy Back (OBB) and Overnight (OVN) rates rose substantially by 8.33% and 8.42% to 9.00% and 9.75%, respectively.

Chapel Hill Denham expects rates to decline to low single digit due to substantial inflows from three bond coupon payments worth N160.32 billion and Open Market Operations maturities of N336.09 billion by next week.

However, sentiments were mixed in the fixed income market amidst rising pressure from #EndSARS protest.

On one hand, Chapel Hill Denham said in a note that short term rates continued to trade upbeat as the liquidity backdrop was supportive.

As a result, the Nigerian Treasury Bill and Open Market Operations benchmark curves eased by 7bps and -65bps to 0.40% and 0.54% respectively.

On the other hand, bond yields expanded marginally by an average of 9bps to 4.13%, due to marginal upward repricing of yields at the short (+22bps to 3.20%) and long (+8bps to 5.55%) end of the curve.

Chapel Hill Denham hinted that non-bank local investors finally exhausted their OMO holdings yesterday.

However, banks and foreign portfolio inflows still have substantially OMO maturities between next week and March.

Analysts stated that investors will be watching if the Central Bank of Nigeria will ramp up OMO issuances to rollover the heavy FPI-dominated OMO inflows in coming weeks.

However, if that is not the case, Chapel Hill Denham expressed believe that the liquidity backdrop will remain supportive of low yields in the fixed in-come market.

Particularly as supply by the Debt Management Office will remain thin in the near term.

Next week, analysts said the Nigerian Treasury Bill auction is scheduled to hold on Wednesday to partly rollover maturities worth N154 billion.

The DMO is scheduled to offer N134 billion, split between 91-day (N29.8bn), 182-day (N10.6bn) and 364-day (N93.9bn) tenors.

The previous auction cleared at 1.00%, 1.00% and 2.00%respectively.

“We expect the auction next week to clear at sub-1%, given the heavy demand and relatively thin supply”, Chapel Hill Denham stated.

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Money Market Rates Spike as Banks Make Provision for FX Auction