Yields on Open Market Operation (OMO) bills are expected to trend higher this week due to mop-up activity by the Central Bank of Nigeria (CBN), given OMO maturities worth N260.2 billion scheduled to come on Tuesday.
OMO bills are short-term securities (matures in less than a year) issued by the CBN on behalf of the Federal Government of Nigeria (FGN) in a bid to control money supply in the economy at any point in time. It is a monetary policy weapon the CBN wields that allows it regulate the flow of money.
Average yields expanded by 45 basis points (bps) week-on-week to 1.5 percent last week from 1 percent the previous week.
The inflow from the OMO maturities would enhance the system liquidity, which stood at N208.4 billion on Friday. Consequently, investors are advised to position to take advantage of the higher yield for better returns.
“Yields are likely to continue to trend higher to better reflect the expansion at the primary market. Thus, we advise investor’s position on the relatively attractive maturities in the secondary market while market players with a longer horizon can take advantage of the improved yields in the bonds space,” analysts at Afrinvest Securities Limited said on Monday.
The CBN on Thursday conducted OMO auction where a total of N170 billion was offered and sold across the 96-, 187- and 362-Day instruments.
The offer of N170 billion was met with significant demand with a total subscription of N315.3 billion, which translated to a 1.9x bid-to-cover ratio.
In October 2019, the CBN adopted a policy prohibiting domestic nonbank institutional investors from reinvesting in OMO bills. The significant liquidity released from maturing OMO bills held by these investors has mostly found its way into the government debt market, which has driven interest rates to record low levels.
The International Monetary Fund (IMF) said capital outflow risks remain considerable with record-low interest rates and still sizable foreign holdings of short-term OMO bills.
IMF staff recommended using OMO bills of shorter maturity (e.g., 14-30 days) and/or T-bills as the main liquidity management instrument rather than the Cash Reserves Requirement (CRR), which has been used in a discretionary manner varying the rates between banks. The CRR itself should be reset to eliminate asymmetry, level the playing field among banks and reduce financial repression. The use of OMO bills should be reserved for liquidity management only, including by limiting OMO tenors to shorter maturities.
Last week, the Nigerian Treasury Bills (NT-Bills) secondary market sustained its bearish run as investors traded cautiously ahead of the Primary Market Auction (PMA) that held on Wednesday.
Average yields on the medium- and long-dated maturities recorded the most sell-offs, advancing 76bps and 55bps W-o-W, respectively, while the short-term instruments witnessed the least sell-offs, inching 8bps W-o-W higher.
At the PMA, the apex bank rolled over maturing bills worth of N130.8 billion (N39bn lower than its initial N169.8bn offer) across the 91- (N24.6bn), 182- (N16.1bn) and 364-Day (N90.1bn) tenors. As expected, stop rates advanced at least 2.0x across all tenors compared to the previous auction, a report by Afrinvest noted.
This week, the Debt Management Office (DMO) is slated to conduct a PMA on Wednesday, offering a total of N150 billion across three re-opening bonds.
“We expect the week to resume on a quiet note at the secondary market, as investors stay on the side-lines in anticipation of Wednesday’s PMA and anticipate activity level to pick up with market players attempting to fill unmet bids from the auction. Therefore, we maintain our advice that investors scout for attractive opportunities across the yield curve,” the analysts said.
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