Analysts Predict Sustained Climb as OVN Rate Soars

Nume Ekeghe

The overnight rate (OVN) in the Nigerian money market skyrocketed last week, reaching a staggering 23.3 per cent.

This 367 basis point increase was primarily driven by debits from the recent FGN bond auction N273.63 billion and net NTB issuance of N250.00 billion, which squeezed liquidity in the financial system.

Despite the surge in the OVN rate, the average system liquidity improved, ending the week at a net long position of N19.74 billion. This was due to increased participation by Deposit Money Banks (DMBs) in the Central Bank of Nigeria (CBN) Standing Lending Facility (SLF) window.

Nevertheless, financial analysts are forecasting that the OVN rate will remain elevated this week, with limited potential for relief.

“While the expected inflow from FGN bond coupon payments of N29.84 billion could offer some temporary respite, it’s unlikely to be sufficient to fully saturate the system and bring down the rate, “said market watchers.

Analysts at Cordos Securities in a report last Friday stated: “This week, the overnight (OVN) rate expanded by 367bps to 23.3 per cent as debits for the FGN bond auction N273.63 billion and net NTB issuance N250.00 billion mounted pressure on the liquidity in the financial system. Notwithstanding, the average system liquidity closed higher at a net long position of N19.74 billion that is a net short position of N109.30 billion in the previous week due to DMBs’ participation at the CBN’s SLF window.

“We envisage the OVN rate will likely remain elevated next week as the expected inflow from FGN bond coupon payments N29.84 billion may be insufficient in saturating the financial system.”

In a related development, trading in the Treasury bills secondary market saw a positive turn as the average yield throughout the market decreased by 263 basis points to 8.7 per cent.

According to analysts, the shift in performance was as a result of two primary factors: “first, participants from the auction moved to the secondary market to compensate for unsuccessful bids at the primary market auction (PMA) last Wednesday, and secondly, market players selectively chose instruments offering attractive yields. Across market segments, the average yield dropped by 272 basis points to 8.3 per cent in the NTB secondary market and decreased by 166 basis points to 12.9 per cent in the OMO segment.”

Cordos in the report stated: “The average yield declined by 272bps to 8.3 per cent in the NTB secondary market and contracted by 166bps to 12.9 per cent in the OMO segment. At this week’s NTB auction, the DMO offered instruments worth N13.58 billion N1.10 billion for the 91-day, N1.28 billion for the 182-day, and N11.20 billion for the 364-day.

“The auction was hugely contested as the total subscription level settled at N1.57 trillion bid-to-offer: 115.7x vs. previous auction: 16.9x. Eventually, the DMO over-allotted bills worth N263.58 billion – NGN728.00 million for the 91-day, N6.35 billion for the 182-day, and N256.51 billion for the 364-day at respective stop rates of 6.25 per cent previously: 9.00 per cent, 11.00 per cent previously: 13.00 per cent, and 13.50 previously: 15.75 per cent.

“Next week, we anticipate yields in the T-bills secondary market will likely trend upwards following our expectations of a still tight financial system.”

Furthermore, on bonds outlook for the week, the analysts noted that over the short term, they expect yields in the FGN bonds secondary market to trend higher, driven by the sustained imbalance in the demand and supply dynamics.