The Central Bank of Nigeria (CBN) drastically reduced its liquidity mop up activities through treasury bills by 81 percent, year-on-year, y/y, to N793 billion in the first quarter of the year (Q1’21).
The apex bank, among other things, controls money supply (liquidity) in the economy by issuing or purchasing secondary market treasury bills, also known as Open Market Operations (OMO) when it wants to reduce money supply, while it injects liquidity by purchasing OMO treasury bills.
The CBN reduced the amounts of OMO bills offered by 80 per cent, y/y, to N858 billion in Q1’21, from N4.26 trillion in Q1’2020. Similarly, the amount of bills sold fell by 81 per cent, y/y, to N793 billion in Q1’21 from N4.44 trillion in Q1’2020. In the same vein, the amount of OMO TBs demanded by the banks and FPIs (public subscription) fell by 41 per cent, y/y, to N3.13 trillion in Q1’21 from N5.31 trillion in Q1’2020.
Further analysis of OMO TBs sold in Q1’21 showed that the CBN offered N103 billion worth of 91-Days bills but sold N85 billion while the public subscription stood at N248.6 billion.
Meanwhile the apex bank raised yields (interest rate) on the OMO TBs apparently to increase the attractiveness of the bills to foreign portfolio investors, FPIs, and enhance foreign exchange inflow. Financial Vanguard analysis showed that average yield (stop rate) for OMO bills rose by 4.55 percentage points to 8.53 per cent at the end of March from 3.98 per cent at the end of December last year.
The CBN raised the stop rate for 91-Days OMO bills by 5.3 percentage points to 7.0 per cent in March from 1.61 per cent in December. It also raised the stop rate for 182-Days OMO bills by 4.05 percentage points to 8.5 per cent in March from 4.45 per cent in December. Similarly, the stop rate for 365-Days bills rose by 4.2 percentage points to 10.1 per cent in March from 5.9 per cent in December.
These were in sharp contrast to the downward trend recorded last year when average yield on OMO TBs crashed by 8.13 percentage points as the CBN slashed stop rate for 91-Days, 182-Days, 365-Days OMO bills respectively by 9.87 percentage points, 7.15 percentage points and 7.36 percentage points respectively from 11.48 per cent, 11.6 per cent and 13.26 per cent at the beginning of the year.
While citing this reversal in the yields on OMO TBs and other fixed income instruments as a factor behind the negative performance of the Nigeria Stock Exchange, NSE, in Q1’21, analysts at United Capital Plc, projected that the upward trend in yields on fixed income instruments will persist in Q2’21. They said:
“Like we noted, the bearish sentiment in the equity market has been stoked by fast-paced reversal in the yield environment. The peak of the reversal appears to be distant even though the pace of increase at recent auctions (Bonds & T-bills) seems to have slowed. We expect upward pressure on yields to garner pace later in Q2-2020 depending on the outcome of the May MPC meeting as well as data from economic recovery.”