The Central Bank of Nigeria's recent decision to cut interest rates has led to a significant surge in demand for Open Market Operations (OMO) securities. In just eight days, investor subscriptions rose by N3.06 trillion, with yields falling across the longer tenors. At the CBN's September 24 auction, investors submitted N6.09 trillion for OMO securities, compared to N3.03 trillion at the previous auction on September 16.
The increase in demand was largely concentrated at the longer end of the curve, as investors sought to lock in yields amid expectations that the rate cut would accelerate the decline in fixed-income returns. The 180-day OMO attracted N3.88 trillion in subscriptions, representing about 8.6 times the amount on offer. The CBN sold N1.315 trillion at a stop rate of 16.99 percent.
The 152-day instrument attracted N1.86 trillion against N450 billion offered and was allotted at a stop rate of 17.29 percent, while the 68-day instrument received N348.58 billion in bids against N100 billion offered. However, the CBN recorded no sale on the 68-day tenor, with bids ranging from 17.79 percent to 19.18 percent.
The latest auction represents a significant repricing from the September 16 sale, when the 153-day OMO attracted N2.18 trillion and stopped at 18.39 percent. The comparable 152-day tenor therefore recorded a 110-basis-point decline in its stop rate within eight days. This indicates that investors are increasingly positioning for a lower interest-rate environment following the CBN's rate cut.
Despite the surge in demand, the CBN sold less, with total OMO sales falling to N2.25 trillion from N2.52 trillion at the previous auction. This left about N3.83 trillion of investor bids unallotted at the latest auction, compared with about N517 billion previously. Analysts at Coronation Merchant Bank attributed the sharp increase in demand to the rate cut and improved liquidity in the system.
The Financial Markets Dealers Association (FMDA) also identified improved liquidity and the MPR cut as key drivers of the decline in fixed-income yields. In its September 23 Treasury bills auction analysis, FMDA said system liquidity had risen significantly to N7.45 trillion from N2.86 trillion at the close of the previous week. Total Treasury bill subscriptions increased to N4.23 trillion from N2.64 trillion at the previous auction.
The direction of yields from here will depend largely on system liquidity, the transmission of the MPR cut, and the CBN's subsequent liquidity-management operations. Analysts expect a further 100 to 150 basis points compression over the next one to two auctions towards 15.00 to 15.50 percent before yields stabilise.
Key points
- The CBN's 350-basis-point interest rate cut triggered a sharp increase in demand for OMO securities.
- Investor subscriptions for OMO securities rose by N3.06 trillion in just eight days.
- The rate cut and improved liquidity drove the decline in fixed-income yields.
