The Central Bank of Nigeria’s Open Market Operations (OMO) auction saw poor demand on Friday despite offering a stop rate of 21.69 per cent, suggesting the market is pushing back against the current rate environment and the central bank’s pricing. The weak response highlights investor resistance to short-term government securities at prevailing yields.
The auction, which was carried out on Friday, October 31, offered N300bn across a 46-day bill and a 60-day bill. The auction ended with a low total sale of N1.11bn, despite a total offer of N600bn and subscriptions of N359.28bn at a stop rate of 21.69 per cent.
Olaolu Boboye, Senior Special Assistant Economist at CardinalStone, a Lagos-based investment firm, said that the recent auction size suggests that the CBN does not want to sell long tenor bills because of the rollover risk. The central bank’s cautious approach reflects concerns about refinancing obligations in a volatile interest rate environment.
The 46-day bill, the shorter tenor, received only N74.10bn in subscriptions; however saw no sale, with a nil stop rate, indicating the bids received were likely too far from the bank’s acceptable price. The 60-day bill’s longer tenor also witnessed weak subscription of N285.18bn, which was still less than the N300bn offered.
Analysts at Rhodium Capital, a Nigerian financial advisory firm, said that with investors demanding yields as high as 24.99 per cent for such short tenors, the CBN appeared reluctant to fill bids at chosen elevated rates. The introduction of 46-day and 60-day bills, among the shortest OMO maturities in recent months, also influenced the market’s pricing behaviour, as participants sought a premium to justify exposure to ultra-short paper.
“Overall, the auction outcome suggests the operation was more tactical than driven by funding needs. Given the decent liquidity backdrop and expected maturities in the coming days, investors may be positioning for another auction with more attractive tenors and potentially better yields. Unless the CBN adjusts its rate expectations or tenor structure, demand at the short end may remain selective,” Rhodium Capital analysts stated.
Matilda Adefalujo, fixed income analyst at Meristem, a Nigerian investment house, suggests that the CBN is trying to achieve this using OMO as a proper liquidity mop-up tool, not just an investment instrument. Open Market Operations are typically used by central banks to manage the money supply in the financial system.
Liquidity has been elevated in Nigeria’s banking system; it was N4tn before the federal government bond auction on Monday, and declined to N2tn as of Thursday. The high liquidity levels reflect excess cash in the banking sector that the central bank seeks to absorb through securities sales.
The Central Bank of Nigeria uses Open Market Operations as one of its monetary policy tools to control inflation and manage liquidity in Africa’s largest economy. OMO bills are short-term securities issued to financial institutions to absorb excess cash from the banking system.
