Rates may trend higher as market expects OMO mop-up this week

IN THE ABSENCE OF CBN’s frequent open market operation (OMO) mop-ups last week, which saw activities in the money market largely driven by the primary market auction (PMA) as well as maturities from treasury bills and OMO instruments in the later part of the week, traders and analysts say they expect the CBN to conduct OMO auctions in line with system liquidity, thus driving money market rates higher.

They equally anticipate a largely positive performance in the treasury bills market as investors prepare to take position ahead of the PMA scheduled for Thursday, June 21.

The CBN last week offered and mopped up a total of N180.8 billion through the 91-day, 182-day and 364-day instruments. As expected, the longer tenored instrument was oversubscribed as total subscription stood at N191.7 billion against N124.6 billion offered. Other tenors however were fully subscribed. Furthermore, maturities worth N424.9 billion (treasury bills – N244.0bn and N180.9bn OMO instrument) hit the system on Thursday countering the effect of the auction conducted the pre
vious day.

This week, an inflow of maturing OMO bills worth N377.62 billion is expected to offer support to system liquidity at the money market. This could, however, be short-lived as liquidity mop-up and forex intervention by the CBN are likely to exert upward pressure on the overnight lending rate. Open buy back (OBB) and overnight (ON) rates moved in tandem with system liquidity. As system liquidity declined to N176.4 billion at the start of the week (from N750.8bn recorded the previous Friday), OBB and ON rates inched 7.0ppts and 7.3ppts higher to 11.8 percent and 12.6 percent.

However, OBB and OVN rates remained relatively stable in subsequent sessions and eased to 3.7% and 4.3% respectively at the close of the trading week following inflows from Treasury bills and OMO maturities. Activities in the treasury bills market last week were bullish, with sentiments supported by relatively healthy liquidity and the absence of OMO auctions.

Consequently, average yield moderated 22 bps to 12.62 percent. Investor sentiment was positive across the short (-38 bps), mid (-20 bps), and long (-8 bps) ends of the curve, amid increased demand for the 7DTM (-129 bps), 182DTM (-107 bps), and 280DTM (-55 bps) bills respectively. Primary market auction embarked on in the course of the week saw the allotment of N6.22 billion, N50.00 billion, and N126.64 billion of the 91-day, 182-day, and 364-day bills.

The bills were 1.39x oversubscribed, with yields closing higher across the 91-day (10.20%; previously 10.00%), 182-day (10.50%; previously 10.30%), and 364-day (11.50%; previously 11.00%) bills. Analysts say they expect yields to be pressured due to anticipated squeeze in liquidity position next week. At the NTB auction scheduled for next week, the CBN is expected to offer N66.68billion – N5.40 billion of the 91-day, N20.00 billion of the 182-day, and N41.29 billion of the 364-day – worth of bills to the market.