Inter-bank rates decline after CBN failed to meet investors’ demand for higher rates 

The overnight inter-bank rate, the rate at which banks borrow and lend to one another, dropped to 18.79 percent on Friday from 24.86 percent on Thursday after Central Bank of Nigeria (CBN) failed to meet investors’ demand for higher rates.

Similarly, the Open Buy-Back (OBB), which is the money market instrument used to raise short term capital declined by 17.71 percent on the same day as against 23.64 percent recorded on the previous day.

The CBN on Thursday auctioned N110 billion via Open Market Operation (OMO) but investors rejected the offer as their demand for higher rates was not met.

  An analysis of the result of the auction seen by BusinessDay shows that the short and long term maturities recorded no sale, while the medium term bills were not bided at all by investors.

Reacting to the development, Ayodeji Ebo, managing director, Afrinvest Securities Limited explained, “The “no sale” was due to demand for higher rate by investors for the short and long term maturities while the “no bid” for the medium term bills was due to more attractive rates in the secondary market.

“We expect the CBN to raise OMO rates at the next auction if the trend persists,” Ebo said in response to BusinessDay.

The OMO simply means the buying and selling of government security, which enables a central bank to control the supply of money in the banking system.

A breakdown of the OMO auction revealed that N20 billion was offered for 98 days tenor, which matures on November 28, 2019. The offer was undersubscribed by N0.10 billion at the bid range of 14 percent but there was no sales.

For the medium term bills, the CBN offered N30 billion but the investors totally avoided the offer, which is expected to mature in February 6, 2020.

The CBN offered N60 billion for 364 days tenor, which is billed to mature on August 20, 2020. The offer was undersubscribed by N19.25 billion as investors bided at a bid range of between 13 and 15 percent but the Apex bank could not sell at that rate.

Consequently the overnight inter-bank rate, declined by 0.50 percentage point to 24.86 percent on Thursday from 25.36 percent recorded the previous day.

However, the Open Buy-Back (OBB) increased by 23.64 percent on Thursday as against 22.86 percent the previous day.

Godwin Emefiele, governor of the CBN said recently in London that the regulators will offer more OMO auctions to counter the upcoming maturities due in September /October. There have been fewer OMO auctions of late. In fact, there may be a requirement to increase yields a bit here to maintain Nigeria’s relative attractiveness to Egypt for fixed income flows (CBN argues Nigeria could remain attractive to Egypt on slightly lower yields given the FX stability).

On Wednesday, last week, the Apex bank rolled over a total of N34.4bn across the 91-, 182- and 364-day tenors at the Primary Market Auction (PMA).

A report by Afrinvest showed that stop rates on the medium- and long-term bills increased to 11.4 percent and 12.0 percent respectively. The offer had significant demand, oversubscribed by 4.3x (N146.5bn total subscription). Interestingly, the 364-day tenor enjoyed the most interest from investors with a bid-to-cover ratio of 6.1x, while the 91-day tenor recorded a 3.4x bid-to-cover ratio. On the flip side, the 182-day offer witnessed weaker demand, recording a bid-to-cover ratio of 0.9x due to more attractive rates in the secondary market.

Also on Thursday, the CBN conducted an OMO auction, offering a total of N150.0 billion across the 85-, 175- and 364-day tenors. The most demand was recorded in the longest tenor with a bid-to-cover ratio of 1.1x while the short and medium offers witnessed meagre demand, having a bid-to-cover ratio of 0.3x and 0.1x respectively.