Uncertainty as CBN rattles interbank with N422bn liquidity mop up

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The direction of interest rate and liquidity level in the interbank money market this week is clouded in uncertainty following the N422 billion liquidity mop up by the Central Bank of Nigeria (CBN) in the first trading of the year.
While the liquidity mop-up enhanced the attractiveness of money market instruments to investors, as it prompted interbank cost of funds to rise by 1,300 basis points (bpts), it however left analysts wondering if the apex bank would maintain the aggressive liquidity mop-up program which occasioned interest rate volatility in the market for most part of 2017.
Financial Vanguard investigation revealed that the CBN commenced the liquidity mop-up operations on Monday with Open Market Operations (OMO) treasury bills (T-Bills) worth N161.5 billion. This was followed by a N260.5 billion OMO T-Bills offer on Friday intended to offset the impact of N193.6 billion inflow from matured T-Bills, which raised market liquidity to N661 billion.
These, combined with another outflow of N157.6 billion through Primary Market (fresh) T-Bills offer, deflated market liquidity and occasioned sharp rise in cost of funds.
Data from the Financial Market Dealers Quote (FMDQ) showed that the N422 billion liquidity mop-up caused interest rate on Collateralised (Open Buy Back, OBB) lending to rise by 1,450 bpts to 18.33 percent at the close of last week, from 3.83 percent the previous week. Interest rate on Overnight lending followed a similar trend, rising by 1,450 bpts to 19 percent from 4.5 per cent the previous week.
This week, while there would be inflow of N309 billion from maturing OMO T-Bills, analysts opined this might not translate to lower cost of funds should the apex bank sustain it liquidity mop-up operations.
“Next week, an OMO maturity of N309.1 billion is expected to hit the system; hence money market rates should remain in the single digit band, barring the resumption of aggressive OMO mop ups by the CBN”, said analysts at Lagos based Afrinvest Plc, in their outlook for this week. Analysts at Lagos based Vetiva Capital Management Limited also stated: “We expect demand to remain healthy in the coming week as investors continue to lock in on declining rates. However continued OMO auctions from the CBN will keep momentum soft”.
Investors sustain interest in Nigeria’s Eurobonds
Prices of Nigeria’s Sovereign and corporate Eurobonds rose last week on the London Stock Exchange due to sustained appetite by foreign investors which prompted increased demand.
Commenting on the price gain by federal government Eurobonds, analysts at Lagos based Cowry Assets Management Plc said: “The 10-year, 6.75 percent JAN28, 2021, the 5-year, 5.13 percent JUL12, 2018 and 10-year, 6.38 percent July 12, 2023 bonds appreciated by $0.90 (yield fell to 4.27 percent from 4.58 percent), $0.12 (yield fell to 3.10 percent from 3.33 percent) (yield fell to 4.91 percent from 5.10 percent) respectively.
According to Afrinvest analysts in the review of the performance of Nigerian corporate Eurobonds, “Sentiment on the corporate Eurobonds remained strong in the first trading week of the year. Consequent on the bullish sentiment, average yield on all corporates fell week-on-week (W-o-W).
The Fidelity Bank 2018 (down 35bps W-oW to 3.1 percent) witnessed the most buy interest, trailed by Ecobank Nigeria 2021 (down 27bps W-o-W to 9.6 per cent). Year to date return on all instruments is currently in the green, with Zenith 2022 (+0.9 percent) advancing the most”, stated Afrinvest analysts.
Naira depreciates in I&E as CBN resumes forex intervention
The naira depreciated by 98 kobo last week in the Investors and Exporters (I&E) window even as the CBN resumed its weekly intervention in the foreign exchange market.
Data from FMDQ showed that the indicative exchange rate of the window rose to N361.31 per dollar on Friday from N360.33 per dollar the previous week. The depreciation was in spite of 23 percent increase in the volume of dollars traded in the window, which rose to $499.47 million last week from $405.7 million the previous week. The naira however remained stable at N363 per dollar in the parallel market.
Financial Vanguard investigation showed that the CBN sustained its intervention in the forex market on Tuesday by offering $100 million through via Secondary Market Intervention Sales (SMIS), by offering $100 million to market participants.

Source: Vanguard

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