The Central Bank of Nigeria's recent decision to cut the Monetary Policy Rate (MPR) by 350 basis points to 23 percent has started to influence money-market yields. This move has resulted in a notable yield gap between Open Market Operations (OMO) securities and Treasury bills. On October 6, the CBN's OMO auction drew N3.51 trillion in bids for N2 trillion of securities offered. The following day's Treasury bills auction attracted N1.77 trillion in subscriptions against N900 billion offered.
A comparison of yields reveals that the 182-day OMO bill was allotted at a stop rate of 16.92 percent, while the comparable 182-day Treasury bill cleared at 15.80 percent. This 112 basis point difference makes the OMO bill more attractive to investors seeking higher returns. As a result, demand for the 182-day OMO bill was strong, with N2.69 trillion in subscriptions, representing a bid-to-cover ratio of 2.69 times. The CBN ultimately allotted N3.31 trillion across the OMO instruments, about 65 percent above the N2 trillion offered.
However, the weaker Treasury bill demand cannot be solely attributed to investor preference for OMO securities. Analysts at the Financial Market Dealers Association (FMDA) note that liquidity conditions played a significant role. System liquidity stood at N7.1 trillion on the day of the OMO auction but fell to about N3.96 trillion the following day, when the Treasury bills auction was conducted. This decline followed the N3.31 trillion OMO allotment, which significantly reduced available liquidity and impacted Treasury bill subscriptions.
The recent opening of the OMO market to a broader range of local investors has increased participation across instruments. Nevertheless, the ability of investors to participate ultimately depends on available liquidity. Treasury bill subscriptions fell 58 percent to N1.77 trillion at the October 7 auction from N4.23 trillion at the previous auction on September 23. The overall bid-to-cover ratio consequently fell to 1.97 times from 8.46 times.
Despite weaker demand, the Debt Management Office (DMO) allotted N968.47 billion, about 8 percent above the offer size and nearly double the N497.59 billion raised at the previous auction. Demand was concentrated on the 364-day Treasury bill, which attracted N1.68 trillion in subscriptions against N700 billion offered. The shorter-dated bills attracted much less interest, with the 91-day bill receiving N39.42 billion against N100 billion offered.
Experts note that investors are naturally attracted to the instrument offering the better return. Tunde Abidoye, head of research at Quest Merchant Bank, stated that investors are looking for the highest yield. He pointed to the difference between OMO yields of about 16.9 percent and Treasury bill yields of around 15 percent, saying investors would naturally move towards the higher return. However, the amount of Treasury bills offered was still exceeded by investor demand.
The CBN's MPR cut aims to ease monetary conditions and improve the transmission of monetary policy to the wider economy. The market is already adjusting to the lower MPR, with Treasury bill yields falling. The FMDA reported that the average secondary market Treasury bill yield declined by 98 basis points to 17.48 percent on October 6 from 18.46 percent on September 23. The current situation creates an interesting policy and market trade-off between the CBN's and the Federal Government's objectives.
Key points
- The Central Bank of Nigeria's decision to cut the MPR has led to a yield gap between OMO securities and Treasury bills.
- Investors are attracted to OMO securities due to their higher yields compared to Treasury bills.
- The weaker demand for Treasury bills is attributed to both investor preference for OMO securities and reduced system liquidity.
