CBN Calms Anxiety in Treasury Bills Market

 • To sustain liquidity management operations

By Obinna Chima    

The Central Bank of Nigeria (CBN) has assured investors that it will continue to carry out its liquidity management mandate through the issuance of Open Market Operations (OMO) bills in order to ensure price stability.

The assurance came following the apprehension in the fixed income securities market last week, when the CBN for the first time this year did not carry out its regular liquidity mop-up, through OMO auction, same week that the Debt Management Office (DMO) announced that the N198.032 billion Nigerian Treasury Bills (NTBs) that would mature in December 2017 would be repaid in full at maturity unsettled the market.

This is just as the central bank at the weekend released its Nigerian Treasury Bills (NTBs) Issue Programme for the first quarter of 2018, which showed that a total of N1.08 trillion of bills would be rolled over in the first quarter.

A breakdown of the NTBs calendar showed that while N42.011 billion of 91-day bills would be rolled over, N190 billion for 182-day and N848 billion for 364-day bills.

Conversely, a total of N1.067 trillion of 91-day, 182-day and 364-day bills would be maturing in the first quarter of 2018.

Treasury Bills and OMO are similar and work almost the same way. Whilst Treasury Bills are issued to finance government budget deficit, OMOs are issued by the CBN for monetary policy management, that is, to control the volume of money in circulation.

The Deputy Governor, Financial System Stability, CBN, Dr. Joseph Nnanna, who spoke with THISDAY, stressed that the central bank had not abandoned OMO, contrary to insinuation in the market.

However, Nnanna pointed out that the issuance of OMO bills was usually influenced by the level of liquidity in the financial system.

He explained: “Tomorrow (Monday) by 10 am, we shall determine the level of liquidity in the banking system and if the liquidity is above the threshold set by the central bank, OMO would be traded.

“The CBN has not abandoned OMO. OMO would be conducted if the threshold is above the optimum level. We strongly believe in macro-economic stability.

“OMO trading will continue for open market operation. We don’t just issue OMO for the sake of issuing OMO. The liquidity in the system determines whether we would carry out OMO or not. If the liquidity is tight, there is no point issuing OMO.

“But if we have liquidity building up as already building up, we would issue OMO. So, there is no apprehension and no cause for alarm. There is no way any central bank can avoid doing OMO. If you don’t do OMO, then you must be very bullish in forex selling.”

Already, there are huge sources of liquidity expected to hit the market this month. These include maturing OMO and Treasury Bills.

In fact, a total of N66.617 billion maturing Treasury Bills are expected to hit the market this Thursday.

In addition, the release of the balance of the Paris Club refund as well as the N750 billion the federal government intends to release for capital expenditure, are also expected to increase the level of liquidity in the banking system.

Maturing government securities have historically been rolled over.

But last week’s announcement by the DMO unsettled the market.

The development saw a lot of foreign investors bidding to repatriate their funds in response to the dramatic decline in yields on short-term dated papers the day before.  For instance, yields on 90-day treasury bills fell to 8.75 per cent.

The pressure was also seen on the forex market as at the parallel market, the naira depreciated by N2, from N363 to the dollar at the beginning of the week, to close on Friday at N365 to a dollar.

Also, activity level on the I&E window weakened relative to the previous week as the total value of transactions declined to $689.57 million, indicating a 38 per cent decline, compared with the $1.111 billion in the prior week. However, NAFEX rates closed at N360.96 to the dollar.

To the Managing Director, Afrinvest Securities Limited, Mr. Ayodeji Ebo, the government trying to see how it can bring down NTB rates with the expectation that it would force banks to lend does not hold water.

 He pointed out that by not conducting OMO last week, there was a lot of liquidity in the system, and so idle funds were being used to purchase whatever maturities.

“Now that we have seen the NTB calendar, I expect that things would stabilise. But I don’t see rates going that high again.

“We also expect that because of the election, there would be increased spending next year and the CBN needs to continue to control the level of liquidity in the system.

“So, there is no way they cannot do OMO. So, I feel all this rush would soon calm down,” he added.

Also, the chief executive of an investment bank who spoke with THISDAY on condition of anonymity, said the decision by the central bank to sell OMO was expected to send a positive signal to investors and cool the tension in the market.

According to him, “the decision by the central bank is also timely because of the build-up of liquidity in the market.

“If nothing is done, that liquidity would be chasing the available instruments and yields would continue to drop. It might heat up the forex market.

“What drives yields expectations in Nigeria’s fixed income market is OMO.”

According to analysts at Lagos-based CSL Stockbrokers Limited, the combination of rising oil prices, stable output from the oil-producing Niger Delta, cheap equity valuations, attractive fixed income yields and, most importantly, favourable forex regime changes this year, appeared to have ticked all the boxes for foreign inflows.

Remarkably, National Bureau of Statistics (NBS) data had shown a 200 per cent year-on-year increase in foreign portfolio investments as of Q3 2017.

“Today, however, considering expectations of relatively unattractive yields, together with pricier equity valuations (particularly for the more liquid stocks), depreciatory pressure on the naira – which has been stable for the most part of this year – becomes more likely,” CSL Stockbrokers added.