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Funding rates to lower in March as N1.0trn hits financial market

Funding rates to lower in March as N1.0trn hits financial market

Inter-bank lending rates are expected to close low this month as inflow worth N1.0 trillion is estimated to hit the financial market, according to Afrinvest Securities Limited.

The inter-bank rates consist of Overnight rate, which is the interest rate that banks charge each other for overnight lending, and Open Repo (OPR) rate, a short-term agreement to sell securities in order to buy them back at a slightly higher price.

The inflow is expected to come from maturities and coupon payment, a report by Afrinvest stated.

However, inflows may subdue money market rates, prompting the CBN to mop-up liquidity via more auction volumes than in February as well as discretionary Cash Reserve (CRR) debits thereby keeping money market rates elevated. Nevertheless, “we do not expect stop rates and auction volumes to deviate significantly from current levels,’’ analysts at Afrinvests said.

After maintaining a robust level through January, system liquidity weakened in February spurred by Open Market Operation (OMO) auctions (N270.0bn) and primary market sales of T-bills and FGN Bonds (N778.2bn). Although an estimated N884.6bn in fixed income maturities and coupon payments hit the system during the month, it was not sufficient to bolster liquidity.

Consequently, funding rates appreciated as the Open Repo (OPR) and Overnight (OVN) rates rose 417bps and 433bps respectively to close February at 11.7 percent and 12.3 percent.

During the review period, the CBN conducted four rounds of OMO auction and two rounds of primary market sale of T-bills, both of which recorded overwhelming buying interest despite the stickiness of rates.

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The CBN mopped up N270.0bn via OMO sales relative to the N1.2tn received in total subscription. Similarly, instruments worth N473.0bn (N576.0bn short of the total subscription received) was sold at the two T-bills auctions with stop rates closing lower by 24bps and 85bps to 2.2 percent and 4.4 percent respectively for the 91 and 364-day instruments while stop rates remained unchanged at 3.3 percent for the 182-day instrument.

In the secondary market, performance was bullish as average T-bills yield closed the month at 3.9 percent, down 59bps m/m. Strong buying interest was observed across tenors as yield fell 83bps, 89bps, and 4bps m/m to 3.2 percent, 3.6 percent, and 5.1 percent respectively for the 91, 182, and 364-day instruments.

At the bond market in February, the domestic bonds market sustained the bullish momentum witnessed in the previous month driven by liquidity following inflows of circa N819.1bn (N528.9bn less than January inflows).

This fuelled an increase in average system liquidity thus shaping market play. Consequently, the average sovereign bond yield fell 67bps m/m to 11.1 percent in the secondary market while the FMDQ/S&P Nigerian Sovereign Bond index rallied 3.7 percent m/m. Across tenors, medium-term bonds recorded the most demand as average yield pared 77bps, trailed by the short and long-dated bonds that saw average yield decline 66bps and 57bps respectively.

At the primary market, the Debt Management Office (DMO) offered 2026 and 2042 sovereign bonds at N75.0bn apiece in line with its calendar. The instruments were oversubscribed at N325.4bn and N232.3bn, representing the bid-to-cover ratio of 4.3x and 3.1x though N103.5bn and N193.9bn were allotted for the JAN 2026 and 2042 instruments respectively. Compared to the January auction, the marginal rate for the 2026 instrument trended lower at 10.95 percent (vs 11.50%) while the rate for the 2042 instrument remained sticky at 13.0 percent. Notably, the DMO changed its FGN Bond auction and settlement days from Wednesdays and Fridays to Mondays and Wednesdays, effective March 1, 2022.

“This month, we anticipate liquidity worth N1.0tn to hit the domestic fixed income space which would partly be mopped up by the reopening of the JAN 2026 and 2042 FGN bonds. In the domestic bonds market, we expect the bullish momentum to be sustained as liquidity is set to be elevated. Meanwhile, the Eurobond markets are expected to maintain the bearish momentum as risk factors persist,” the analysts said.