The Central Bank of Nigeria (CBN) withdrew about N3.31 trillion from the banking system through its Open Market Operations (OMO) auction on October 6, exceeding the roughly N2.17 trillion in OMO bills that matured and leaving the financial system with a net liquidity drain of about N1.14 trillion.
The latest operation extends the apex bank’s aggressive liquidity-management campaign after it withdrew approximately N6.62 trillion on a net basis through OMO auctions in September, signalling that the CBN remains focused on sterilising surplus naira liquidity even as it eases its benchmark interest rate.
The liquidity withdrawal came despite strong investor demand and substantial funds returning to the banking system through maturing securities. Investors submitted N3.51 trillion in bids, against the N2 trillion the CBN initially offered.
Market conditions nevertheless tightened at the margin, with the overnight lending rate rising 25 basis points to 22.2 percent, according to Cordros Securities’ daily market update.
The auction also revealed a strong investor preference for longer-dated OMO instruments, with the 182-day bill accounting for about 80.7 percent of the total amount allotted.
Longer tenor attracts stronger demand
The CBN offered N1 trillion each in 147-day and 182-day bills but ultimately allotted about N3.31 trillion, equivalent to 165.4 percent of the amount initially offered.
Demand was heavily skewed towards the 182-day instrument, despite its lower stop rate.
Investors submitted N2.69 trillion in bids for the 182-day bill, compared with the N1 trillion on offer. The CBN allotted N2.67 trillion, representing about 99.2 percent of subscriptions, at a stop rate of 16.92 percent.
The instrument is scheduled to mature on April 6, 2027, allowing the CBN to lock away a significant portion of banking-system liquidity for a longer period.
By comparison, the 147-day bill attracted N817.95 billion in subscriptions against N1 trillion offered. The CBN allotted N637.20 billion at a 17.22 percent stop rate.
The bidding pattern is notable because investors accepted a 30-basis-point lower yield on the longer-dated instrument, suggesting that demand for liquidity-management securities remains strong even as OMO rates gradually decline.
Both stop rates were lower than at the September 29 auction, when the comparable 147-day and 182-day instruments cleared at 17.24 percent and 16.94 percent, respectively.
OMO sterilisation continues after N6.62tn September drain
The October auction comes after the CBN stepped up its use of OMO securities in September to mop up excess liquidity.
Across five September auctions, the apex bank sold about N17.51 trillion in OMO bills, while approximately N10.89 trillion matured, resulting in a net withdrawal of around N6.62 trillion from the financial system.
The September 29 auction accounted for the largest single net withdrawal during the month, with about N4.69 trillion sold against N2.43 trillion in maturities.
The October 6 auction was smaller than that operation in headline terms, but the CBN sold considerably more of the 147-day and 182-day instruments combined.
Excluding the 266-day bill offered on September 29, the CBN had sold approximately N1.69 trillion in the comparable shorter-tenor instruments. On October 6, sales across the two tenors reached about N3.31 trillion.
The Monetary Policy Committee cut the Monetary Policy Rate by 350 basis points to 23 percent on September 22, its largest reduction since 2006.
Yet, rather than allowing the resulting liquidity conditions to loosen unchecked, the CBN has continued to use OMO auctions to absorb funds from the banking system.
The increase in the overnight lending rate to 22.2 percent following the latest auction indicates that the liquidity drain is beginning to exert pressure at the short end of the money market.
However, system liquidity has remained substantial. More than N6.2 trillion was placed at the Standing Deposit Facility on September 29, while estimated net system liquidity stood at about N8.57 trillion during the week, according to previously reported market data.
Money-market yields have generally softened alongside the decline in OMO stop rates.
Average OMO yields in the secondary market fell six basis points to 18.7 percent, while average Treasury bill yields declined one basis point to 17.8 percent, Cordros Securities reported.
The bond market, however, moved in the opposite direction.
Average FGN bond yields increased seven basis points to 15.7 percent, reflecting selling pressure on benchmark securities including the February 2031, February 2034 and September 2036 bonds.
With the CBN simultaneously lowering its policy rate and aggressively deploying OMO operations, the central bank’s current strategy appears to be one of monetary easing on the price of money while maintaining tighter control over the quantity of excess liquidity in the financial system.
