Nigeria: Interest Rates Decline Will Persist – Dealers

Liquidity inflows totalling N1.02 trillion will hit the interbank money market this month aggravating the volume of excess cash in banks

The inflows comprise N335.13 billion coupon (interest) payment on FGN Bonds, N390 billion matured secondary market treasury bills (Open Market Operations, OMO), and N295.33 billion from matured primary market treasury bills (Nigeria Treasury Bills).

Money market dealers who spoke to Financial Vanguard at the backdrop of the impending inflows said in the absence of aggressive liquidity mop-up by the Central Bank of Nigeria, CBN, the development is expected to aggravate the downward trend in interest rates on treasury bills which had characterised yields in the first two months of the year.

Financial Vanguard findings show that investors suffered a 51 basis point (bpt) decline in the average interest rate on Nigeria Treasury Bills (NTBs) to 3.29 per cent in February from 3.81 per cent in December.

Similarly, average benchmark yields on FGN Bonds fell by about 120bpt month-on-month between January and February 2022.

The lower returns were prompted by the prevailing excess liquidity (idle funds) in the interbank money market, a situation that triggered a sharp decline in banks’ borrowing from the CBN as well as the upsurge in demand for government securities.

Among other things, the excess liquidity was caused by a net inflow of N542.15 billion from matured OMO bills into the interbank money market from January to February 2022. During the two months, the CBN repaid N972.15 billion worth of matured OMO bills and sold N430 billion worth of the same bills leaving the net balance at N542.15 billion.

Reflecting the prevailing excess cash situation, the average opening position of the market in terms of liquidity rose sharply by 125 per cent to N306.55 billion in February 2022 from N135.98 billion in December 2021.

The significance of the liquidity upsurge is also reflected in the sharp decline in the banks’ borrowings from the CBN, through the apex bank’s Standing Lending Facility, SLF, and Repurchase arrangement, Repo, which fell by 71 per cent to N666.8 billion in February 2022 from N2.34 trillion in December 2021.

On the other hand, banks’ deposits of excess liquidity in the apex bank’s Standing Deposit Facility, SDF, rose sharply by 132 per cent to N489.05 billion in February from N210.05 billion in December.

The excess liquidity also triggered an upsurge in demand for government securities, resulting in oversubscription to the tune of 424 per cent in the February 2022 auction conducted by the CBN, up from the 355 per cent recorded in the auction held in December 2021.

Financial Vanguard findings show that the oversubscription followed a 35 per cent increase in total subscription (investors demand) to N602.62 billion in February from N446.3 billion auction in December last year.

Though the CBN offered N115.28 billion worth of bills, up by 17 per cent from N98.01 billion in December, it took advantage of the huge subscription to sell N258.01 billion, representing 20 per cent increase from N214.96 billion sold at the auction in December.

Furthermore, the CBN reduced the stop rates on the bills as the stop rate for the 91-Days bills fell by 26 bpts to 2.24 per cent in February from 2.5 in December. Similarly, the stop rates on the 184-Days Bills and 364-Days bills fell to 3.3 per cent and 4.35 per cent in February representing 14 bpts and 115 bpts decline from 3.44 per cent and 5.5 per cent at the last auction in December.

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Analysts’ views

According to analysts at FBNQuest, an investment arm of the First Bank Group, the declining trend in treasury bills rates will be aggravated this month by the N1.02 trillion inflow into the money market.

Making this projection in their outlook for the fixed income market in March, they said: “System liquidity is expected to stay elevated in March as OMO maturities worth N390 billion will hit the market. This is coupled with NTB maturities of N295.33 billion and coupons worth N335.13 billion.

“Thus, we expect money market rates to decline, hovering around single digits. For the bonds market, we expect demands to persist as investors look to reinvest their coupons and idle cash.

On his part, the Nnamdi Nwizu, Co-Managing Partner/Founder, Comercio Partners Limited, an investment banking company, noted that the decline in interest rate will persist until the CBN abolishes its current Pro-Growth monetary policy, to that of defending the naira.

In an exclusive interview with Vanguard, Nwizu, who leads the Trading division of Comercio Partners, where he is responsible for overseeing fixed-income investments for individual and institutional investment management accounts, explained: “A pro-growth strategy implies that the government will continue to favour liquidity injection and low-interest rates over a hawkish stance of raising rates to attract foreign portfolio investors to the fixed income market. High-interest rates mean a higher propensity to save and also makes it more expensive for corporates and retail investors to access funds needed for growth.

“The CBN by choosing a Pro-Growth strategy means that rates should remain relatively low and liquidity injection by the CBN, which should lead to increased demand for government securities by investors, and they look for outlets for their excess liquidity.”

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