Investors shun mid-tenor instruments as CBN sells N1.9trn OMO bills

The Central Bank of Nigeria (CBN) sold N1.9 trillion in Open Market Operations (OMO) bills at the latest OMO auction, with investor demand reaching N2.2 trillion, far exceeding the N600 billion offered.

The auction also showed weaker interest in mid-tenor instruments, with demand concentrated at the short and longer ends of the curve.

Breakdown of subscriptions indicates that demand was concentrated at the short and long ends of the curve. The 7-day instrument attracted N884 billion in subscriptions, while the 140-day paper recorded the highest demand at N1.25 trillion.
In contrast, the 91-day tenor saw significantly weaker interest at just N87 billion, with only N21 billion allotted.
Stop rates settled at 21.90 percent for the 7-day bills, 19.87 percent for the 91-day tenor, and 19.91 percent for the 140-day instrument, reflecting a narrow yield spread between the medium and longer maturities.
“Investor behaviour suggests a cautious market, with participants uncertain about whether interest rates have peaked. This is driving a preference for short-dated instruments for flexibility, while also supporting demand for longer tenors to lock in current yields,” said Oluwaseun Williams, a fixed income analyst

The apex bank offered N600 billion across the 7-day, 91-day, and 140-day tenors, but total subscriptions climbed to about N2.2 trillion, with N1.9 trillion eventually allotted, underscoring robust liquidity conditions in the financial system.

The auction results show that while cash levels remain elevated, investor behavior is becoming more strategic, with participants balancing yield opportunities against expectations around the future direction of interest rates.

Analysts say weak demand for the 91-day tenor reflects a yield mismatch that makes it unattractive relative to both shorter- and longer-term alternatives.

“Now that stop rates on the 91- and 140-day papers are close, investors would rather go for longer maturities,” said Victor Ogundijo, a fixed income trader at CardinalStone.

Market participants note that the 7-day instrument, offering the highest yield, continues to attract investors seeking flexibility, allowing them to roll over funds at elevated rates while avoiding being locked into longer tenors.

At the same time, demand for the 140-day paper reflects a growing preference among some investors to lock in yields over a longer horizon, particularly amid expectations that rates may begin to stabilise.

“The 91-day tenor is in a ‘no-man’s land’. It offers a lower return than the 7-day paper, while not giving enough premium to justify locking funds compared to the 140-day instrument,” Williams explained, citing engagements with foreign portfolio investors and banks.

This divergence highlights a market that remains liquid but increasingly selective, as investors adopt a barbell strategy, either staying short to maintain flexibility or extending duration to secure yields.

Analysts also attribute the sustained demand to a combination of strong system liquidity and attractive yield levels.

“Demand reflects a combination of strong system liquidity and the yield levels, which also explains the weaker interest in the mid-tenor,” said Titilayo Daramola, an industry expert.

Despite offering N600 billion, the CBN allotted N1.9 trillion, reflecting its continued use of OMO bills as a key tool for absorbing excess liquidity in the system.

“Allotment is largely a function of demand, within levels the CBN is comfortable with, and it also supports the bank’s liquidity mop-up objective,” Daramola added.

Analysts say the central bank’s ability to sell significantly above its initial offer indicates that liquidity remains ample, even as authorities step up efforts to tighten monetary conditions.

However, any impact on system liquidity is expected to be temporary.
“Even with higher allotments, any liquidity squeeze is likely to be short-lived, given expected inflows from maturities, coupons, and FAAC distributions,” Daramola said.

With stop rates holding near the 20 percent mark and demand still elevated, market participants are expected to remain active in subsequent auctions, although participation is likely to remain selective as investors continue to navigate yield opportunities and evolving rate expectations.