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By Chinwendu Obienyi
Banks across the country increased the amount of money they kept with the Central Bank of Nigeria (CBN) in October, raising total deposits at the apex bank’s Standing Deposit Facility (SDF) to about N3 trillion. This happened even as cash circulation in the financial system became much tighter, leaving less money available for lending and business transactions.
The SDF allows banks to deposit excess cash with the CBN and earn a small interest instead of leaving the money idle. When loan demand is weak or risky, parking funds with the CBN feels safer.
The increased deposits represented a 21.5 per cent month-on-month (m/m) rise equivalent to about 64.8 times the value of borrowings through the Standing Lending Facility (SLF), according to market data.
This meant that banks preferred the CBN’s overnight window to capitalize on a roughly 600- basis-point rate premium over comparable short-term Treasury bill yields.
Despite the heavy inflows to the SDF, overall financial system liquidity conditions deteriorated, with the average deficit widening by 25.7 per cent m/m to N2.7 trillion from N2.1 trillion in September.
Market dealers said liquidity distribution remained uneven, as a few banks held large surpluses while others faced tighter funding.
“The CBN’s relatively high SDF rate continues to sterilize liquidity. Banks find it more attractive to earn risk-free returns at the apex bank rather than deploy funds into the market”, the report said.
The central bank intensified its liquidity-mopping operations, with net issuances largely open market operations (OMO) bills, rising 22.2 times m/m to N3.6 trillion, reversing a net redemption of N178.3 billion in September. The surge in OMO supply reflected the authorities’ continued effort to rein in excess liquidity and anchor short-term rates.
Interbank funding costs were broadly steady despite the squeeze. The Overnight Policy Rate (OPR) was unchanged at 24.5 per cent, while the Overnight Rate (OVN) eased marginally by 6 basis points to 24.9 per cent.
At the primary OMO auctions, the CBN offered N2.4 trillion across various tenors and drew robust investor demand, with subscriptions reaching five times the amount on offer. Ultimately, the bank allotted N4.4 trillion, translating to a 37 per cent bid success rate. The average stop rate fell sharply by 627bps to 20.2 per cent, signaling strong appetite for the higher-yielding instruments.
Activity in the Nigerian Treasury-bills (NT-bills) market was relatively softer. The CBN offered N640 billion in October, down 30.3 per cent m/m, while total bids reached N1.8 trillion – a 2.8 times subscription rate, up from 2.5 times in September. Investors remained heavily skewed towards longer dated maturities, where demand hit 7.5 times compared with 0.5 times and 0.2 times for mid and short term papers.
Average stop rates edged lower to 15.15 per cent, 15.38 per cent and 15.96 per cent for the 91-, 182-, and 364-day bills respectively, versus 15.16 per cent, 15.40 per cent and 16.90 per cent the prior month.
The apex bank sold about N1 trillion, accepting roughly 56.5 per cent of total bids.
In the secondary market, fixed-income yields repriced lower by 51 basis points (bps) month-on-month to 17.6 per cent on average. Traders attributed the decline to cooling inflation and growing rate-cut expectations, which spurred demand across the curve. Short-dated tenors fell 82 bps to 16.8 per cent, the mid-segment dropped 57 bps to 17.4 per cent, and long-dated papers slipped 15 bps to 18.6 per cent.
Market participants expect sentiment to remain bullish through November, with focus shifting to the final Monetary Policy Committee (MPC) meeting of the year. Absent any hawkish surprises, traders anticipate further yield compression as liquidity dynamics and inflation trends guide positioning into year-end.
