The decision by the Central Bank of Nigeria (CBN) to ban non-bank institutions from the Open Market Operations (OMO) auctions in both primary and secondary market has triggered a liquidity squeeze in the treasury bill market that has sent treasury yields higher in the past week.
While treasury yields averaged 12% in the week before the ban, treasury yields have now moved one percentage point higher to 13% in the past week as price discovery has become more difficult in the OMO market with limited participants.
The OMO ban means that only Deposit Money Banks (DMBs) and Foreign Portfolio Investors (FPIs) can participate in OMOs, while everyone else, including non-bank financial institutions, will have to shift focus to T-bills and other investment options.
It appears individuals and non-bank institutions who were prevented from participating in the OMO market have been turning their sight to fixed income market. Average bond yields fell from 14% to 13% in the past week as bond prices rallied off the back of increased activity in the fixed income space.
“We expected to see bond yields drop in response to increased activity in the fixed income market. Money has to flow somewhere and if you stop it going into the treasury bill market, investors will go for the next best thing which the long-dated bills,” said Dr. Tochukwu Okafor, Lecturer in Banking and Finance at Covenant University.
About N1.2 trillion in OMO bills owned by non-bank institutions and individuals will fall due over the next two months and will not be rolled over due to the ban. This then means that we could see over N1trillion flow into the fixed income market over the next two months, sending bond yields even lower.
“I think we might see bond yields trading around 11.5%-12% towards yearend as the big rush into the fixed income market sends bond prices higher. The big winners from this decision may be the bond investors who will be enjoying a double blessing of higher yields and higher bond prices. Suddenly bonds have become the best place to be in the market,” Okafor added.
Analysts had earlier forecasted that investors may consider returning to the stock market due to the OMO ban. The All Share Index closed the week higher, returning 0.1% week on week growth. This halted a 5-week losing streak in the market for investors.
“Investors may not necessarily be rotating asset class from treasury bills to stocks here. It may just be a case of stocks being repriced higher as bond yields decline. I wouldn’t pay too much attention to the stock market, it is not really a reasonable alternative for a risk shy investor who you will typically see in the OMO market,” Okafor told BusinessDay.