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Money market squeezed by funding pressures as overnight rate expands by 700bps w/w to 18.0%, banks sell-off T-bills to fund cash obligations

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SAT 06 FEB, 2021-theGBJournal- The overnight (OVN) rate expanded by 700bps w/w to 18.0% as system liquidity (weekly average c. NGN224.52 billion) was squeezed by funding pressures for CRR debits, and the CBN’s weekly OMO (NGN71.66 billion) and FX auctions, amidst inflows from OMO maturities (NGN112.27 billion) and FX retail refunds.

We expect liquidity to remain tight in the coming week, as expected inflows from OMO maturities (NGN213.87 billion) may not be sufficient to offset the outflows from the system. Thus, we expect the OVN rate to remain elevated.

Treasury bills

The Treasury bills secondary market remained bearish, as the average yield across all instruments expanded by 16bps to 1.5%. The overall market was majorly dragged by the OMO segment (average yield expanded by 31bps to 2.0%), as the tight liquidity in the system forced local participants i.e., banks, to sell-off various positions to fund their cash obligations. Also, offshore investors added to the rout, as they continued sell auction bills, in anticipation of higher yields at the weekly auction.

Interestingly, at this week’s OMO auction, the CBN increased stop rates on the offered bills by an average of 467bps across the three tenors – its highest level since May, 2020. In our view, the results of the auction suggest that the CBN is trying to attract and retain FPIs, and as such, ease pressure on the naira.

Elsewhere, the NTB market was supported by wholesale demand for some mid and long dated instruments. Thus, the average yield in the segment eased by 1bp to 1.0%.

For next week, we maintain our expectation of a gradual uptick in secondary market yields amidst the persisting bearish sentiments in the T-bills market. At the NTB segment, we expect market focus to be shifted to the PMA on Wednesday, where the CBN is expected to roll over NGN169.78 billion worth of instruments.-With Cordros Research

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