February witnessed a significant resurgence of liquidity in Nigeria’s banking system, rebounding from a deficit of N307.5 billion in January to a surplus of N572.8 billion. This remarkable turnaround was primarily fueled by substantial inflows from various sources, including repayments from the primary market, Open Market Operations (OMO) repayments, and transactions through the Standing Lending Facility (SLF). These inflows significantly outweighed the outflows resulting from OMO sales, primary market auctions (PMAs), and the Standing Deposit Facility (SDF), ultimately tipping the scales towards a positive liquidity position. The influx of funds from primary market repayments amounted to a substantial N2.9 trillion, while OMO repayments contributed N823.3 billion, and SLF transactions added another N24.2 trillion. Conversely, outflows through OMO sales reached N1.4 trillion, PMAs accounted for another N1.4 trillion, and SDF withdrawals totaled N4.2 trillion.
The improved liquidity environment had a direct impact on key interest rates, leading to a noticeable decline. Both the open repo rate and the overnight rate experienced downward pressure, decreasing by 2.4% and 2.2% month-on-month, respectively, settling at 26.8% and 27.3%. This easing of rates reflects the increased availability of funds within the banking system, making it less expensive for banks to borrow from each other. The decrease in these key rates can stimulate economic activity by reducing borrowing costs for businesses and individuals.
The Central Bank of Nigeria (CBN) conducted auctions in the primary market for both OMO and Treasury Bills (T-Bills), offering instruments worth N1.4 trillion for each. The OMO auction witnessed robust investor participation, particularly for longer-term instruments. The 355-day and 362-day tenors attracted significant demand, clearing at 21.3% and 21.5%, respectively. The overall bid-to-cover ratio for the OMO auction reached 2.5x, highlighting the strong investor appetite for these instruments. Similarly, the NT-Bills auctions generated substantial interest, with a total subscription of N5.6 trillion, although only N1.4 trillion was ultimately sold. The long end of the curve experienced the highest demand, boasting a bid-to-offer ratio of 5.5x, while shorter-term notes saw lower demand, with ratios of 0.8x and 0.3x for short and mid-dated notes, respectively. The stop rates for the 91-day, 182-day, and 364-day bills decreased to 17.0%, 18.0%, and 18.4% respectively, compared to the previous month’s rates of 18.0%, 18.5%, and 21.0%.
Investor preference for longer-term instruments was evident in both the OMO and T-Bills auctions. This can be attributed to the desire to lock in higher yields amid expectations of a further yield correction following the rebasing of the Consumer Price Index (CPI), which led to a material decline in inflation figures. Investors anticipated that yields would fall further in the future, making locking in current higher rates on longer-term instruments an attractive strategy.
The improved liquidity conditions also permeated the secondary market, where average yields experienced a notable decline of 3.3% month-on-month, reaching 20.2%. Buy-side interest was observed across the entire yield curve, with short, mid, and long-term instruments witnessing yield declines of 2.6%, 2.8%, and 4.6%, respectively. Consequently, yields on short, mid, and long-term instruments settled at 19.4%, 19.8%, and 21.3%, respectively. This broad-based decline in yields underscores the positive impact of improved liquidity on the secondary market.
Looking ahead, analysts anticipate the bullish sentiment in the fixed-income market to persist, primarily driven by expected net inflows of N2.6 trillion from bond coupon payments and maturities. These inflows are projected to further bolster liquidity and support the downward pressure on yields. Investor sentiment will continue to be influenced by monetary policy decisions, prevailing liquidity conditions, and yield movements. Market participants are expected to adopt a cautious yet opportunistic approach, carefully assessing the evolving market dynamics while seeking opportunities to capitalize on favorable conditions.
The observed trends in the fixed-income market reflect the interplay of various factors, including the CBN’s monetary policy stance, investor behavior, and overall liquidity dynamics. The substantial inflows from various sources contributed significantly to the improved liquidity position, which in turn influenced interest rates and investor preferences. The expectation of further yield corrections, coupled with upcoming bond coupon payments and maturities, is likely to maintain the bullish sentiment in the market. However, investors are expected to remain vigilant and adapt their strategies based on evolving market conditions and policy decisions.
