MONEY MARKET: As Liquidity Crunch Hits Fixed Income Markets

Following the continuous tightening stance adopted by the Monetary Policy Committee (MPC) which has seen benchmark interest rate rise to 18 per cent, liquidity at the money market remained pressured last week as traders say they expect liquidity to remain tight in the coming days.

At the end of last week, tight liquidity has seen overnight rates rise to 18.9 per cent while the bear persisted at the bond and treasury bill ends of the market despite federal government bond coupon payments and Open Market Operation (OMO) maturities.

Last week, there had been N453.61 billion disbursement from the Federal Account Allocation Committee (FAAC) as well as N131.2 billion bond coupon payments and N40 billion OMO maturities. Despite this, traders said, the average system liquidity was settled at a net short position of N380.85 billion as against a net short position of N40.72 billion in the previous week.

Moreover, activities at the Treasury bills secondary market was bearish last week, with traders saying the tight system liquidity drove participants to sell off their holdings across the NTB segment of the market. As a result, the average yield across the market expanded by 181bps to 7.5 per cent.

Across the market segments, average yield at the NTB segment advanced by 194bps to 7.7 per cent but remained at 4.0 per cent in the OMO segment.

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Last week, the CBN  had offered instruments worth N145.47 billion at the NTB auction. It offered N2.16 billion for the 91-day, N3.34 billion for the 182-day, and N139.96 billion for the 364-day.

Traders said demand at the auction was significantly lower than the previous primary market auction, as the total subscription level settled at N168.58. The auction closed with the CBN allotting precisely what was offered with respective stop rates of 6.0 per cent, 8.0 per cent and 14.74 per cent.

Similarly, the FGN bonds secondary market closed on a bearish note as investors sold their positions across the curve following the release of the Q2-23 bond issuance calendar where the Debt Management Office (DMO) replaced the 2037 and 2049 bonds with the 2042 and 2050 bonds.

Accordingly, the average yield expanded by 37bps to 13.6%. Across the benchmark curve, the average yield expanded at the short (+83bps), mid (+21bps), and long (+27bps) segments following selloffs of the MAR-2024 (-321bps), APR-2032 (-48bps) and JAN-2042 (-42bps) bonds, respectively.

This week, traders expect the system liquidity to remain pressured in the absence of any significant inflow into the financial system. They also envisage higher yields in the Treasury bills secondary market, following expectations of low inflows into the financial system.

Meanwhile at the foreign exchange market, the naira lost N0.02 or 0.3 per cent week on week to close at N748 to the dollar compared to N746 to the dollar which it closed the previous week in the face of currency crunch.

At the investors’ and exporters’ foreign exchange window, the Naira depreciated slightly by N0.05 or 0.01 per cent week on week to close at N461.38 to the dollar from N461.33 despite the growing foreign exchange demand pressure on the Naira.

A look at activities at the Interbank Foreign Exchange Forward Contracts market, showed that the spot exchange rate remained unchanged closed at N462 to the greenback. Also, the exchange rate in the weekly Naira FX Forward Contracts Markets was in the mixed bag across all forward contracts with appreciations reported at the 1-Month, 2-Month, 3-Month Contracts by +0.13, +0.29 and +0.26 per cents respectively to close at offer prices of N467.25, N474.37 and N483.08 week on week.

On the other hand, the dollar gained at the 6-Month and 12-Month contracts against the Naira by +0.14% and +0.62% week on week to close at contract offer prices of N511.96 to the greenback and N565.28 respectively.

In the oil market last week, oil price movement saw a rebound of the commodity to trade at $79.28 per barrel on OPEC not increasing production in the midst of confidence returning to the global banks and higher demand as China economic recovery expand.

The price of Bonny light plummeted by 7.6 per cent week on week, to close at $79.57 per barrel from $73.96 barrel the previous week.

This week, traders expect the naira to trade in a relatively calm band across various market segment barring any market distortion in the face of the naira scarcity and as the apex bank continues its weekly foreing exchange market intervention to defend the value of the naira.