Follow Us on Google
By Chinwendu Obienyi
Despite investors’ preference for treasury bills, system liquidity in the banking system further declined from a deficit of N236.3 billion in December to a negative N307.5 billion in the month of January, a monthly market report from Afrinvest Research revealed at the weekend.
System liquidity in the money market refers to the availability of cash and short-term funds within the banking system. It influences interest rates, credit availability, and overall financial stability.
The report noted that the decline was primarily due to FAAC allocations of N1.4 trillion (reducing banks’ borrowing needs) and the Central Bank of Nigeria’s (CBN) N500.0 billion OMO auction at the start of the month.
As a result, the overnight policy rate (OPR) and overnight rate (OVN) increased by 1.8% apiece month-on-month (m/m) to 29.1% and 29.6%, respectively.
Commercial banks have been facing significant liquidity challenges in recent months. According to a report, last month, banks reportedly borrowed N8.2 trillion from the apex bank in just 17 days to address liquidity issues and boost lending to the economy.
This substantial borrowing indicates a persistent liquidity crunch in the banking sector.
Investors showed strong interest in the recent auction conducted by the Debt Management Office (DMO) and the OMO conducted by the CBN with about N2.5 trillion (the DMO was aiming to raise N530 billion) resulting in a bid-to-offer ratio of 4.8x.
The government offered T-bills in three durations: 91-, 182-, and 364-days, with the 364-day bills attracting the most funds. Despite high demand, the DMO sold N756.0 billion worth of bills, with interest rates remaining mostly steady.
The report noted that investor preference for longer maturity instruments is underpinned by the need to lock-in on the current high yield given uncertainty around monetary policy direction post-CPI reconstitution exercise.
In the secondary market, average yields contracted by 2.5% m/m to 23.5%, driven by buy-interest on the short-, mid-, and long-end of the curve, with yield decreases of 4.4ppts, 2.5ppts and 0.7ppts m/m to 22.0%, 22.6%, and 25.9% respectively.
Stakeholders in the banking sector whilst weighing in their opinion, said the overall context suggests that a decline in system liquidity to this level in January 2025 is plausible given the ongoing challenges in the Nigerian banking sector.
“In February, system liquidity is expected to be further drawn down as the CBN conducts more T-bills auctions to absorb inflows from anticipated OMO. Investor sentiment will likely be influenced by expectations of a benchmark interest rate hike by CBN at the upcoming monetary policy meeting, making T-bills an attractive and relatively safe investment for higher returns,” they said.
