…OMO rates seen sustaining FPI inflows

Liquidity surge and inflation rate decline drove the one-year treasury bill yield to 21.68 percent at Wednesday’s auction, from 22.59 percent seen at the previous sales.

The stop rates on the one-year and 182-days T-bills also drew closer at 17.82 percent and 17.75 percent respectively, with the real return on the one-year T-bill staying positive at 2.8 percent.

Analysts attribute this partly to the rates’ response to the rebased inflation, which stood at 24.48 percent in January 2025 from 34.8 percent in December 2024.

This is coupled with expectations of further moderation in the year, which fuels a strong buying interest from investors.

The current yield is the lowest yield since the beginning of the hawkish policy stance by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which led to an 850 basis point hike in interest rates.

Matilda Adefalujo, fixed-income analyst at Meristem, had projected in an earlier report that stop rates for the offered instruments would likely decline.

“We anticipate further rate declines, driven by improved system liquidity, which, as at Monday, was N582.95 billion, also added to the system is a maturing obligations of N1.30 trillion, twice what is being offered, making investors net-liquidity receivers,” Adefalujo had noted.

“Lower Treasury-bill paper supply of N650 billion versus N700 billion in the prior auction. Given these factors, the CBN may seize the opportunity to further ease borrowing costs by lowering stop rates across all tenors.”

A liquidity of about N4.5 trillion is expected to hit the system in March.

What does declining yield mean for economy?

While the declining yield environment is favourable for the government’s domestic debt servicing, there are concerns that the lower yields could trigger capital outflows, potentially undermining the CBN’s efforts and putting renewed pressure on the naira.

Analysts at CardinalStone pointed in their fixed-income report that foreign interest would remain strong in open market operation (OMO) instruments, whose yield remains relatively stable and competitive at 27.3 percent.

Notably, OMO bills, which remain restricted to foreign investors and banks, have experienced milder yield moderation than T-bills.

“Our scenario analysis suggests that significant capital outflows would only materialize if the one-year OMO rate declines to 22.0 percent or lower, provided the fundamental outlook for the naira remains relatively stable.”

“Furthermore, even if foreign portfolio investors (FPIs) choose to exit, finding reinvestment opportunities with comparable yields may be challenging across most frontier and emerging markets (EMs)—especially as several central banks have already begun monetary easing,” they said in the report.

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How does this affect the secondary market?

Since the last auction, the T-bills secondary market has remained predominantly bullish. As of March 3, 2025, the average yield on T-bills had fallen by 206 basis points to 19.90 percent, compared to 21.96 percent post-auction.

Timeline of the yield on one-year T-bills

Yield on the one-year bill grew from nine percent at the first auction in January 2024 to 23.44 percent by the end of February, which was a signal of the rate hikes that happened. It then spiked to 27.33 percent in March just after the first rate hike by the MPC.

By November, it had peaked at 30.7 percent before gradually declining to current levels.

Demand at the auction

Demand for the one-year bill remained high at N1.8 trillion on Wednesday, although lower than N2.4 trillion of the previous auction.

Overall, the CBN sold only N774.1 billion worth of the N2.4 trillion subscription.

The 182-day and 91-day treasury bills saw minimal interest by investors. Only N61.52 billion of the N70 billion 91-day bill was sold. Likewise, of the 182-day bill, only N50.94 billion was sold.

Yields on the 182-day dropped to 19.48 percent from 19.97 percent, while that of 91-day remained at 17.76 percent.