The Central Bank of Nigeria's recent decision to cut interest rates has led to a significant surge in demand for Open Market Operations securities. Investor subscriptions rose by N3.06 trillion in just eight days as yields fell across longer tenors. At the September 24 auction, investors submitted N6.09 trillion for OMO securities, compared to N3.03 trillion at the previous auction. This represents a 100.7 percent increase despite the CBN offering N1 trillion at both auctions.
The increase in demand was mainly 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 against N450 billion offered, 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 also saw significant demand, with N1.86 trillion in subscriptions against N450 billion offered.
The latest auction represents a significant reprice 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 recorded a 110-basis-point decline in its stop rate within eight days. However, the CBN recorded no sale on the 68-day tenor, with bids ranging from 17.79 percent to 19.18 percent. 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 to about N517 billion previously. Analysts at Coronation Merchant Bank noted that much of the repricing had already taken place at the front end of the market before the Monetary Policy Committee decision. They 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.
The analysts also stated that the OMO market would be an important indicator of whether monetary easing was translating into actual market pricing. The CBN had allotted approximately N4.40 trillion in a single September week, with 154-day paper at a 19.96 percent effective yield. If OMO stop rates begin following the MPR lower, it would indicate that the easing cycle has genuinely begun.
The Financial Markets Dealers Association identified improved liquidity and the MPR cut as key drivers of the decline in fixed-income yields. 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. Demand was heavily concentrated on the 364-day Treasury bill, which attracted N4.09 trillion against N300 billion offered.
The simultaneous surge in OMO and Treasury bill demand, alongside falling primary-market yields, indicates that investors are positioning for a lower interest-rate environment following the CBN's rate cut. 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.
Key points
- The Central Bank of Nigeria's 350-basis-point interest rate cut triggered a sharp increase in demand for Open Market Operations securities.
- Investor subscriptions for OMO securities rose by N3.06 trillion in just eight days as yields fell across longer tenors.
- The CBN sold N1.315 trillion at a stop rate of 16.99 percent for the 180-day OMO.
