Liquidity surge drives OMO comeback despite foreign investor retreat

Demand for the Central Bank of Nigeria’s Open Market Operations (OMO) bills rebounded sharply on the recent CBN auction, as excess liquidity in the financial system drove subscriptions to about N3 trillion, reversing last week’s weak investor appetite.

“The improved demand was influenced by increased interbank liquidity on the back of inflows from bond coupons and OMO maturities that have been in the system,” said Victor Ogundijo, a certified financial analyst at CardinalStone.

The apex bank sold N2.36 trillion worth of OMO bills at the auction, significantly above the N600 billion initially offered, as investors moved to deploy surplus funds into high-yielding short-term instruments.

The sharp rebound marks a turnaround from the previous week, when demand weakened amid rising global uncertainty. Foreign Portfolio Investors (FPIs), traditionally key participants in the OMO market, had pulled back as geopolitical tensions in the Middle East triggered a broader risk-off sentiment.

At last week’s auction, the CBN struggled to attract demand, selling just N81 billion out of the N600 billion on offer. The 8-day bill recorded no sale despite receiving bids, while other tenors saw significant bid rejections, reflecting weak investor participation.

The cautious sentiment extended across the fixed income market, with treasury bill subscriptions declining and yields on Nigeria’s Eurobonds rising, signalling a flight to safety among offshore investors.

However, conditions shifted this week as liquidity in the financial system rose sharply. System liquidity increased to about N8.2 trillion from N6.6 trillion in the prior week, supported by inflows from maturing securities and coupon payments, according to CSL Stockbrokers.

“Strong system liquidity of about N8.3 trillion meant there was ample cash chasing OMO bills, and with attractive yields, expectations of locking in current rates, and banks needing to sterilise excess funds, demand surged to over N3 trillion,” said Akintayo Popoola, a fixed income analyst.

Auction results showed that the 8-day bill attracted N533 billion in subscriptions, with N303 billion allotted at a stop rate of 21.9 percent. The longer 113-day instrument recorded N2.49 trillion in demand, out of which N2.05 trillion was sold at a stop rate of 19.79 percent.

Analysts noted that interbank liquidity remained elevated, estimated at around N9 trillion, further supporting strong participation.

“The improved demand was influenced by increased interbank liquidity on the back of accumulated inflows from bond coupons and OMO maturities that have been in the system,” said Victor Ogundijo, a fixed income analyst.

Ogundijo added that the central bank adjusted stop rates on the longer-dated bills to absorb the excess demand.

The auction also had an immediate impact on the foreign exchange market. The naira, which had weakened to around N1,400 per dollar earlier in the day from about N1,360, recovered to approximately N1,380 following the auction.

According to Ogundijo, the development highlights the CBN’s continued use of OMO operations to manage liquidity conditions and limit volatility in the foreign exchange market.

Recent data from Meristem show that system liquidity has begun to moderate slightly to around N8.15 trillion following recent primary market and OMO activities, indicating the impact of the central bank’s liquidity management efforts.

Analysts say the rebound appears to be driven primarily by domestic liquidity rather than a return of foreign investor confidence, leaving market direction sensitive to global risk conditions. (BusinessDay)