Liquidity Surge Eases Funding Rates

The Nigerian money market experienced a turnaround last week as hefty liquidity inflows reshaped the funding landscape, reversing earlier tightness and driving a broad-based decline in short-term rates.

System liquidity had opened the week in deficit, fuelling modest pressure on interbank rates. However midweek, inflows of about N653.79 billion, comprising N350 billion from Open Market Operation (OMO) maturities and N303.79 billion from Treasury bills maturities, boosted market liquidity and eased funding strains.

The Nigerian Interbank Offered Rates (NIBOR) fell sharply across all maturities on the back of the liquidity buffer. The Overnight NIBOR slid 379 basis points (bps) week-on-week to 28.75 per cent, despite heightened activity at the Central Bank of Nigeria’s (CBN) Standing Deposit Facility. Similarly, the 1-month, 3-month, and 6-month NIBOR eased to 29.17, 30 and 30.59 per cent, respectively.

Similarly, funding rates saw a downtrend, with the Open Repo (OPR) rate dipping 320bps to 28.90 per cent while the Overnight rate dropped 280bps to 29.15 per cent.

Performance was mixed in the Nigerian Treasury Bills True Yield (NITTY) market. The 1-month and 12-month tenors increased by 6bps and 168bps to 16.13 per cent and 20.74 per cent, respectively, as investors priced in long-term risks. Conversely, the 3-month and 6-month tenors declined by 39bps and 4bps to 16.73 per cent and 18.37 per cent.

Despite stronger system liquidity, profit-taking dominated the secondary Treasury bills market, pushing average yields up 42bps to 18.38 per cent. Analysts described the move as cautious repositioning ahead of primary auctions.

Liquidity-driven demand was particularly evident at the week’s OMO auction. The CBN offered N600 billion across 89-day and 124-day papers, but subscriptions surged to N1.02 trillion, reflecting a healthy bid-to-offer ratio of 1.69x. Over N1 trillion in bids targeted the 124-day paper, underscoring investor appetite for longer tenors. Ultimately, N897.2 billion was allotted, with stop rates of 25.50 per cent (89-day) and 25.99 per cent (124-day).

At the final NTB auction for August, the apex bank offered N230 billion across 91-day, 182-day, and 364-day maturities. Demand reached N396 billion, largely skewed (90%) toward the 364-day tenor.

A total of N303.78 billion was allotted, with stop rates climbing on the 91-day and 364-day maturities to 15.35 per cent and 17.44 per cent, respectively, while the 182-day paper was unchanged at 15.50 per cent. The bid-to-cover ratio, however, dropped to 1.30x from 2.12x at the previous auction, suggesting a moderation in demand despite improved liquidity.

The N350 billion in OMO maturities is expected to bolster liquidity this week, and analysts at Cowry Asset Management say they expect funding rates, particularly the Overnight NIBOR, to trend further down as banks deploy excess liquidity more efficiently.

“However, given the volatility in investor positioning and preference for longer-dated instruments, tactical opportunities may still emerge for bargain hunters in the short end of the curve,” the firm noted.

Also, Commercio Partners analysts say they expect that market rates would ease in the coming sessions, supported by upcoming OMO maturities and bond coupon inflows. “These should temporarily ease funding pressures, barring any unexpected outflows,” they said.