Banks channel N3.78trn surplus cash into government securities as CBN holds rates

The Central Bank of Nigeria (CBN)’s rate hold and a sizeable cash surplus in the banking system lifted demand for government securities last week, as investors continued to deploy available liquidity into fixed-income assets amid easing yield pressures.

According to market data obtained by Daily Sun, the banking system liquidity closed the week at N3.78 trillion, indicating that banks were still sitting on a large pool of cash despite a moderation from the previous week.

The level of liquidity was strong enough to keep short-term funding conditions comfortable and support active participation in the Treasury bills, OMO and bond markets.

Market activity was buoyed by persistent investor appetite across both the primary and secondary markets. With rates unchanged at the Monetary Policy Committee (MPC)’s recent meeting, participants in the market interpreted the policy stance as supportive of a stable, high-yield environment, encouraging continued buying in government securities.

System liquidity had opened the week with a net surplus of N3.20 trillion, lower than the N4.68 trillion recorded in the

previous week, largely reflecting a decline in balances at the Central Bank of Nigeria’s (CBN) Standing Deposit Facility (SDF).

Liquidity was subsequently boosted by N1.50 trillion in Open Market Operations (OMO) bill maturities, which provided substantial inflows into the banking system.

However, funding conditions tightened midweek following a N929 billion debit for the settlement of the Federal Government of Nigeria (FGN) bond auction. Despite this liquidity withdrawal, elevated SDF balances helped cushion the impact, allowing system liquidity to close the week at a healthy N3.78 trillion, albeit below the previous week’s level.

The money market also reflected the liquidity surplus. The Open Repo Rate held at 22.00 per cent, while the Overnight Rate settled at 22.12 per cent, showing that funding conditions remained broadly stable.

According to experts at different research houses, the resilience in these rates suggested that banks had sufficient cash buffers to meet near-term obligations without excessive borrowing pressure.

They noted that the current environment continues to favour fixed income investors, particularly those looking for relatively safe returns in a high-interest-rate setting.

“The combination of strong liquidity, attractive yields and a rate hold stance has kept demand robust, especially for Treasury bills and FGN bonds. That demand has, in turn, supported a downward move in yields as buyers outnumber sellers in several segments of the market”, they said.

They added that investors are expected to remain focused on liquidity flows, upcoming OMO maturities and the Central Bank’s possible sterilisation actions.

“Looking ahead, market participants are expected to remain focused on liquidity conditions and primary market activity for further direction. With investor demand remaining resilient and secondary market yields continuing to compress, buying interest is likely to remain well supported, although the pace of further yield declines may depend on upcoming liquidity injections and debt issuance”, analysts at Coronation Merchant Bank said.

For their part, analysts at Cowry Research said, “We expect market liquidity to remain relatively comfortable, supported by N500 billion in OMO bill maturities. However, the CBN is likely to conduct another OMO auction to sterilise excess liquidity and reinforce its tight monetary policy stance.

In addition, the Bank, on behalf of the Debt Management Office (DMO), is scheduled to conduct the semi-monthly Treasury bills auction, offering N700 billion across the 91-day (N100 billion), 182-day (N100 billion), and 364-day (N500 billion) maturities. Given the prevailing high-interest-rate environment and investors’ continued preference for risk-free assets, we expect the auction to attract strong subscription levels”.

For now, the large cash surplus in banks remains a key tailwind for government securities. As long as liquidity stays elevated and the policy stance remains restrictive, demand for Treasury bills and bonds is likely to remain firm, even if further yield declines come at a slower pace.