Treasury bill yields falls as CBN suspend OMO

Treasury bill yields continued to fall on Friday as the Central Bank of Nigeria (CBN) suspended its Open Market Operations (OMO).
CBN halted OMO at the end of last week and the results of that auction were: 93-day (Discount rate: 15.8 percent, Effective yield: 16.46percent) and 191-day (Discount rate: 17.5percent, Effective yield: 19.32percent) and no sale was done that day despite receiving N61 billion worth of subscriptions from traders.
“In the near term, the unexpected suspension which will boost liquidity levels raises prospect of a rapid flattening of the Nigeria yield curve as outflows from maturing OMO bills and increased demand from institutional investors (pension funds and asset managers), trying to avoid re-investment risk, applies downward pressure on short-dated yields,” Wale Okunrinboye, Fixed Income and Currency Researcher at Ecobank, said.
“It is important to note that the positive real return on Treasury bill yields, which drove the inversion at the short end of the yield curve for most of 2017, stemmed from the elevated rates on OMO bill issuances.”
Open market operations refer to the central Bank buying and selling government securities in the open market in order to expand or contract the amount of money in the banking system.
Lower interest rates on short dated instruments is likely to pressure asset yields for Nigerian Banks, which climbed across board in the first half of the year and greatly boosted interest income among banks.
Shorn of this revenue source, Tier I banks, with more robust capital buffers and relatively lower NPL ratios may need to start thinking about growing risk assets to bolster return on equity.
“However, for Tier II banks with a reduced ability to take on credit risk, aside the lower rates on term funding it is likely to underpin a moderation in cost of funds. However, one must measure these gains against the impact of other measures on liquidity such as the asymmetric application of CRR which has kept banking liquidity tight,” Okunrinboye said.
The CBN issues Treasury bills frequently in standard benchmarks at 91-day, 182- day and 364-day for refinancing purpose, managing liquidity and funding the FG budget deficit.
Yields on all tenors fell last Thursday with the one year fixing quoted at 16.93 percent down 0.84 percentage points, 6-month tenure at 16.6 percent and 3-month at 15.52 percent, according to data from the FMDQ OTC.
Yields were as high as 18.5 percent for the one year paper earlier in the year.
Investors have been piling into Nigerian fixed income securities due to high yields and stable currency especially with an improving inflation outlook.
Analysts say the move to suspend OMO is consistent with the CBN’s dovish forward guidance for interest rates and hints at an increased ability to manage the exchange rate with a growing surplus in the current account (driven by higher oil prices and stable oil production), stronger FX reserves and increased FPI appetite for NGN assets.
“Investors are likely to apply a lower hurdle rate for asset valuation which could drive an upward re-rating of more risky assets (equities for instance). Perhaps, unsurprisingly the NSEASI has recently started to test multi-year highs in December,” Okunrinboye said.
Since the beginning of this week, after the resumption from the public holiday observed last Friday, the CBN has not conducted any OMO auction.

 
MICHEAL ANI AND OLADIPO OLADEHINDE