OMO auction sees low sales as FPIs hit the brakes

Foreign Portfolio Investors (FPIs) are considering safer investment havens following escalating tensions in the Middle East, which have resulted into poor results at the recent Open Market Operation (OMO) auctions.

The investors, who typically favour the OMO market, are now prioritising capital preservation over high yields.

“This isn’t just about the rate anymore; it’s about risk appetite. FPIs are the traditional backbone of the OMO market. With global uncertainty rising, they are choosing to stay liquid or move capital to developed markets rather than locking into emerging market debt, no matter how attractive the yield looks on paper,” Johnson Chukwu, chief executive officer, Cowry Asset Management firm said.

On Monday, of the N600 billion total offered across all tenors, the CBN was only able to sell N81 billion.

It offered N200 billion OMO bills with a 20.99 percent yield on the 113-day tenor and only sold N68 billion. And on the 8-day bill, despite receiving N156 billion in bids, the CBN opted for a no sale; this suggests the regulator was unwilling to meet the higher yield for such a short duration.

Read also: Nigeria’s Eurobond yields spike as Middle East conflict weigh on sentiment

For the 99-day paper, the CBN sold only N13 billion out of the N148 billion subscribed. This means the regulator rejected over 91 percent of the bids for this tenor.

Total OMO subscriptions plummeted to N767 billion this week, a sharp decline from the N4 trillion highs seen in late January and 712 billion seen last week.

This was also observed at the Treasury Bill Primary Auction last week, where subscriptions dropped by half to N2 trillion from N4 trillion at the previous auction.

It also reflected in the yield on Eurobonds, as the average yield of Nigerian dollar bond increased to 7.17 percent as at Friday from 6.98 percent the previous week.

The  US-Israeli attack on Iran nearly two weeks ago has caused a flight to safety, such as the dollars and U.S treasuries.

Omobola Adu, fixed income expert and economist at CSL Stockbrokers confirm that the snub is driven more by a flight-to-safety among offshore investors.

‘When the Strait of Hormuz is in the headlines, emerging market yields no matter how high, become secondary to capital preservation,’ he noted. ‘FPIs are  adopting a wait-and-see stance until the fog of war clears.’

Other analysts say that  CBN is facing a standoff with the country’s deposit money banks, despite a financial system overflowing with trillions of naira in idle cash, as banks get higher interest from depositing with the apex bank and other fixed income assets.

“The rates on OMO have not been attractive for a while for the banks and they’ll rather put it in other instruments such as T-bills, commercial papers, SDF and the likes. Banks have to ensure that their cost of fund is lower than the rates, its why the CBN increased the rates at this auction,” Abayomi Fasina, a risk manager said.

With a 101-basis-point (1.01 percent) gap favoring the overnight deposit window, banks have little incentive to commit capital to OMO bills for nearly four months at a lower rate.

This marked the second consecutive week of poor sales for the regulator’s liquidity management strategy. Just last week, a similar offer with a 20.55 percent yield was met with equal indifference from a market that appears to be losing its appetite for the CBN’s short-term debt instruments.