The Nigerian financial markets are currently experiencing high liquidity levels, with strong expectations that interbank rates will remain pressured. This development follows significant inflows, including a ₦340 billion coupon payment and ₦10 billion worth of Open Market Operation (OMO) bills, contributing to a robust liquidity environment.
Analysts from Afrinvest (West) Africa have noted that this surge in liquidity is likely to exert downward pressure on interbank rates. As a result, the market is expected to see bullish sentiment dominate, particularly in the secondary market. Investors and market participants are closely monitoring these movements, which are set to influence short-term borrowing and investment strategies.
At the same time, the Central Bank of Nigeria (CBN) has taken additional measures to slash spot rates on short-term borrowing instruments. This has resulted in further declines in the average yield on short-term investments, reflecting aggressive investor demand for money market assets. The slowdown in inflation rates has been a key factor behind this strong demand, with many investors seeking lower-risk options as market uncertainty persists.
The Nigerian Treasury Bills (NTB) market has been particularly active, witnessing strong buying interest that has pushed yields lower across tenors. Investors' expectations of easing inflation in August fueled this demand, though there are mixed sentiments regarding the trajectory of the Consumer Price Index (CPI) in the months ahead. The OMO bills segment has similarly experienced a decline in yields due to sustained demand, driving yields lower.
At a recent primary market auction, the Federal Government, through the Debt Management Office (DMO), offered NT-bills with a combined value of ₦169.9 billion across 91-day, 182-day, and 364-day tenors. The auction was met with healthy demand, achieving bid-to-offer ratios of 2.6x, 1.3x, and 3.6x, respectively, for the different tenors. However, despite strong investor interest, the DMO capped its allotments at ₦169.9 billion, leaving ₦401.3 billion worth of bids rejected.
The high level of demand led to lower stop rates across tenors. For the 91-day, 182-day, and 364-day tenors, rates fell by 37, 50, and 35 basis points (bps) to 16.6%, 17.0%, and 18.6%, respectively. This marks a significant shift from previous auction levels, reflecting the growing investor appetite for these risk-free assets.
The most recent NTB auction conducted by the CBN on September 11, 2024, saw a significant influx of demand, with total subscriptions reaching ₦563.17 billion across the three tenors. This represented an oversubscription rate of 248%, further underscoring the strong demand for these safe-haven assets. However, despite the large volume of subscriptions, the offered amount stood at ₦161.88 billion, marking a notable 50.14% decrease in total subscriptions compared to the previous auction held on September 4, 2024, which attracted ₦1.13 trillion in bids.
This high demand for Treasury bills and other short-term investment options indicates that investors are increasingly focused on safe, liquid assets in the current economic climate. However, as inflation trends remain uncertain, market participants are likely to continue navigating a challenging environment where liquidity boosts and rate pressures play a critical role in shaping financial strategies.
Looking ahead, interbank rates are expected to remain low, buoyed by robust system liquidity. As the market continues to digest these liquidity inflows and rate cuts, we anticipate sustained investor interest in money market assets, with a keen eye on inflation data and future policy actions from the CBN.
This dynamic financial landscape presents both challenges and opportunities for investors, particularly as they seek to balance risk and return in an environment of low rates and abundant liquidity. The current trends underscore the importance of staying informed and agile in the ever-evolving Nigerian financial markets.