CBN high OMO auction rates meant to attract foreign investors

FOLLOWING THE INCRE MENT OF STOP rates at the OMO auction last week, the secondary market witnessed major selloffs of bills that have been previously issued at 13.5 percent, which went up 40 basis points to 14 percent, amidst these selloffs, market analysts have said that the CBN is trying to attract foreign investors.

At the OMO auction last week, the CBN sold a total of N229.52 billion, emanating from N120 million of the 105DTM, N45.70 billion of the 182DTM and N229.52 billion of the 329DTM worth of bills, at respective stop rates of 11.25 percent, 12.75 percent, which went up by 25 basis points and 14 percent which increased by 50 basis points.

Many will say the CBN is majorly after liquidity levels, however, Bukky Aregbesola, team leader, fixed income at Access Bank, has suggested that the Apex bank is trying to increase yield in a bid to attract foreign interest.

Aregbesola said, “I think the CBN is intent on taking rates up, and it not about managing liquidity, what they are trying to do is to attract investment, majorly foreign investment, therefore the yields have to go up for that to happen,

“Treasury bills have gone as high as 18.5 percent be- fore now, far back as a year, so I think that at those levels we will see foreign interest increasing. On the bond side, we are about 15.5 percent now, maybe with another 50 basis points and we will see foreign investment inflow.

Speaking on the Central Bank’s effort to stabilise the foreign exchange rate, Aregbesola questioned how long the CBN could continue to stabilise the rates given the increase in demand.

She said: “It is obvious that the CBN wants rates to be stable at this level. They believe that the foreign reserves are about 10 months of import cover and if that’s the idea, there is nothing the market can do about that, but I expect forex rates to respond accordingly to the increasing demand push. Already, at the IEFX market and cash market we see rate have begun to inch up, so, there is only so much they can do about that.”

However, Mustapha Wahab, analysts at Cordros Capital, suggests that CBN has enough breathing space to sustain its intervention thanks to the increasing crude oil prices and strong foreign reserves.

“CBN has continued its intervention to ward off speculative tendencies against the naira. With increased demand for FX at the I&E window, the CBN has stepped up its intervention across its different strata of FX windows. To be specific, over Q3 2018, CBN sold a total of $3.96 billion at the I&E window, which is more than 2 times more than Q2, against that backdrop, the FX reserve depleted by $3.48 billion,” Wahab said.

He added: “In my view, a strong CBN inflow driven by higher crude oil price and prospects of $2.8 billion Eurobond, combined with strong FX reserves, I believe the CBN has more than enough legroom to keep the naira at the current level through the rest of the year,” he said.

Activities in the treasury bills market were bearish as market players sold off on the back of tightened liquidity position, a 26 basis point uptick in average stop rates at the primary auction, and hikes in the rates of all the bills.

As a result, yields rose 28 basis point on average, week-on-week, to close at 13.53 percent. Sell pressure was spread across the curve (short: +9 bps; mid: +2 bps; long: +17 bps), amid selloffs of the 76DTM (+64 bps), 132DTM (+64 bps), and 328DTM (+36 bps) bills, respectively.

At the bond market, the bearish trend was sustained, with sentiments weighed by the increase in short-term rates, as well as the release of the October bond auction circular which indicated an offering of NGN115 billion.

Consequently, yields rose by 14 basis points on average week-on-week to close at 14.99 percent. Yields contracted across the short (+32 bps), mid (+6 bps), and long (+4 bps) ends of the curve following selloffs of the JUN2019 (+39 bps), JUL-2030 (+10 bps), and JUL-2034 (+13 bps) bonds, respectively.