Central Bank Tightens Liquidity, Withdraws N15trn From Financial System In January

Nigeria’s money market closed the month under sustained liquidity pressure, despite a modest improvement in system balances, as the Central Bank of Nigeria’s aggressive monetary tightening continued to drain cash from the financial system.

Average system liquidity in the month of January settled at a net negative of N2.4 trillion, improving slightly from the previous month’s -N2.9 trillion. Overall, the CBN withdrew more than N15 trillion from the financial system during the month through aggressive liquidity management operations, although the net tightening was significantly lower. The gross mop-up comprised N8.5 trillion in Open Market Operations sales, N2.9 trillion placed by banks at the Standing Deposit Facility and N3.7 trillion raised through primary market issuances. These outflows were partly offset by inflows of about N8.4 trillion from OMO maturities, primary market repayments and Standing Lending Facility usage, leaving system liquidity in a sustained deficit and keeping interbank funding conditions tight.

The marginal recovery, however, masked the scale of outflows recorded during the period, driven largely by Standing Deposit Facility placements of N2.9 trillion, OMO sales totalling N8.5 trillion and primary market sales of N3.7 trillion.

These outweighed inflows from the Standing Lending Facility of N51.8 billion, OMO maturities of N5.6 trillion and primary market repayments of N2.8 trillion. Reflecting the tight liquidity environment, the cost of interbank borrowing remained elevated. The Open Buy Back Rate and Overnight Rate both rose by 3.6 percentage points month on month to close at 26.1 per cent and 26.4 per cent respectively, underscoring sustained funding stress across the banking system.

Last month, the apex bank conducted two Nigerian Treasury Bills (NTB) auctions and three rounds of Open Market Operations (OMO). For the NTB auctions, instruments worth N2.4 trillion were offered across the 91-day, 182-day and 364-day tenors. Investor appetite was robust, with total bids reaching N4.9 trillion, translating to a bid to offer ratio of 2.2 times.

Demand was strongest for the long-dated 364-day paper, which recorded a bid-to-offer ratio of 2.4 times, while the 91-day and 182-day tenors attracted weaker interest with a bid-to-offer ratio of 0.8 times and 0.6 times, respectively. At the close of the auctions, the CBN allotted a total of N2.2 trillion.

In addition, the bank intensified liquidity sterilisation through OMO auctions, withdrawing N8.5 trillion from the system in a move aimed at mopping up excess naira liquidity and supporting foreign exchange inflows.

Yields in the secondary Treasury bills market trended higher, with the average yield rising by 60 basis points month on month to 18.5 per cent. Short and mid tenor bills bore the brunt of selloffs, as yields on these instruments climbed by 107 basis points and 72 basis points to 17.4 per cent and 18.4 per cent, respectively.

Long-dated bills, however, traded largely flat as market operators say they expect bearish conditions to persist in the near term, as tight liquidity and ongoing fiscal financing needs continue to exert upward pressure on yields.

In the bonds market, the Debt Management Office opened the year’s auction calendar by reopening the FGN February 2031, February 2034 and January 2035 bonds, offering a combined N900 billion. Investor demand was strong, with total subscriptions translating to a bid to offer ratio of 2.5 times. The January 2035 bond attracted the highest interest at 3.6 times, reflecting growing investor preference for longer-dated securities amid improving confidence in the macroeconomic outlook. The February 2034 and February 2031 bonds recorded ratios of 2.5x and 1.7x, respectively.

At the end of the auction, the DMO allotted N398.1 billion on the February 2031 bond at a marginal rate of 17.6 per cent, while N576.3 billion and N570.1 billion were allotted on the February 2034 and January 2035 bonds at 17.5 per cent apiece.

Secondary market activity in FGN bonds turned bullish during the month, supported by portfolio managers’ positioning to lock in attractive yields amid expectations of further rate moderation driven by easing inflation. Consequently, average bond yields declined by 8 basis points to 16.5 per cent, with yields on short- and mid-term instruments compressing by 25 and 2 basis points to 16.6 per cent and 16.9 per cent, respectively. In contrast, yields on long dated bonds edged higher by 20 basis points to 15.8 per cent.