Banks channel surplus cash into high-yield government bills

By Chinwendu Obienyi

Banks are increasingly channeling excess liquidity into high-yield Treasury bills and other government securities, as attractive returns and limited lending opportunities continue to drive strong demand for sovereign debt.

This is coming after trading in the treasury bills secondary market closed on a bearish note this week, with average yields rising by 15 basis points to 18.9 per cent, according to market data. The movement reflected profit-taking activities and investor repositioning ahead of the Central Bank of Nigeria (CBN)’s latest Open Market Operations (OMO) auction.

While yields in the Nigerian Treasury Bills (NTB) segment remained broadly unchanged at 17.5 per cent, the OMO market recorded stronger upward pressure, with average yields climbing by 9 basis points to 21.1 per cent as investors unwound positions to create room for fresh subscriptions at the auction.

The development underscores the sustained liquidity conditions in the financial system, where banks and institutional investors continue to channel excess cash into government securities offering attractive risk-adjusted returns.

At the last OMO auction, the apex bank offered N600 billion across the 35-day, 70-day and 126-day maturities. Demand significantly outpaced supply, with total subscriptions reaching N2.71 trillion, more than four times the amount on offer.

In response to the strong investor interest, the apex bank allotted N1.57 trillion across the three tenors at stop rates of 21.54 per cent, 20.70 per cent and 20.10 per cent, respectively.

The strong subscription levels reflected the abundance of liquidity in the banking system, alongside investors’ preference for secure, short-dated instruments amid lingering macroeconomic uncertainties and elevated benchmark interest rates.

Also, the aggressive demand also signals that market participants still consider treasury instruments attractive despite signs that yields may gradually decline if liquidity conditions remain loose.

Financial system liquidity has remained elevated in recent weeks due to maturing securities repayments, FAAC disbursements and limited sterilisation pressure, leaving banks with significant cash balances seeking investment outlets.

As a result, analysts expect the strong demand trend to persist in the near term, particularly at the next Nigerian Treasury Bills Primary Market Auction scheduled for Wednesday.

The Debt Management Office (DMO) is expected to offer N650 billion worth of Treasury bills at the auction. Market traders who spoke to Daily Sun, say they anticipate robust participation from banks, pension funds and asset managers, supported by the current liquidity environment. They added that they expect stop rates to remain broadly stable or decline marginally if demand continues to outpace supply.

The outlook suggests that although yields remain historically elevated, the sustained inflow of liquidity into the fixed-income market could gradually compress returns over the coming weeks as investors compete aggressively for available government securities.

Overall, the fixed-income market remains firmly supported by liquidity dynamics, with banks continuing to dominate demand as they deploy surplus cash into high-yield government instruments.

However, traders caution that volatility in yields may persist in the near term, as shifting liquidity flows and auction cycles continue to shape market direction.