OMO yield premium attracts N4.93tn investor demand

Investors placed N4.93tn worth of bids for the Central Bank of Nigeria’s Open Market Operations bills on Thursday, underscoring the strong demand for high-yield short-term instruments amid elevated interest rates.

The amount subscribed was more than eight times the N600bn the apex bank initially offered across two maturities, highlighting the growing attraction of OMO bills relative to comparable Treasury bills.

The CBN allotted N2.60tn, substantially above the amount initially offered, according to the auction data published by the central bank.

The latest auction points to a widening yield advantage for OMO bills, with investors willing to commit substantial funds to securities offering returns around 20 per cent.

The 103-day OMO bill, which matures on 24 November, attracted N1.27tn in subscriptions against an offer of N300bn. The CBN allotted N450bn at a stop rate of 20.39 per cent, with successful bids ranging from 19.90 per cent to 20.46 per cent.

Demand was significantly stronger for the 138-day instrument, which matures on 29 December. It received N3.66tn in bids, more than 12 times the N300bn offered.

The CBN allotted N2.15tn of the 138-day paper at a stop rate of 20.01 per cent. The instrument recorded a true yield of 21.66 per cent.

The demand is particularly significant because OMO bills are offering a sizeable premium over comparable instruments.

It must be pointed out that the 103-day OMO bill cleared at 20.39 per cent, compared with about 16.30 per cent for the 91-day Treasury bill, representing a yield difference of roughly 409 basis points.

Similarly, the 138-day OMO bill’s 20.01 per cent stop rate was about 351 basis points above the 16.50 per cent stop rate on the 182-day Treasury bill.

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This differential is creating a strong incentive for investors to favour OMO instruments when allocating short-term funds.

The sustained demand could also have implications for banks’ deposit pricing, as investors gain access to OMO bills through their banks.

“With investors able to secure returns around 20 per cent from CBN instruments, banks may face greater pressure to offer more competitive rates on deposits and other savings products to retain liquidity,” said an emerging markets and fixed income analyst, Ike Ibeabuchi.

Analysts expect the yield differential between OMO bills and Treasury bills to narrow over time as market participants respond to the pricing gap.

The latest auction also comes against the backdrop of heavy liquidity management by the CBN.

The apex bank injected a net N5.21tn into the banking system in the week preceding the auction, including an N2.48tn OMO repayment on 11 August. It subsequently returned to the market with another large OMO sale.

The CBN had also mopped up N4.69tn through OMO auctions conducted on 3 and 4 August, while more than N7tn had been absorbed through OMO auctions in July, according to the auction data and market reports.

The continued appetite for OMO bills despite the scale of recent liquidity operations suggests that substantial funds remain available within the financial system and are seeking attractive short-term returns.

More importantly, the auction demonstrates that the CBN’s OMO programme is increasingly influencing the pricing of Nigeria’s wider fixed-income market.

As long as OMO yields remain significantly above Treasury bill rates, investors are likely to continue reassessing where to deploy short-term liquidity, potentially putting pressure on banks, money-market instruments and government securities to offer more competitive returns.