Overnight Lending Rate Falls Sharply on Cash Inflow



By Obinna Chima

The overnight tenor of the Nigerian Interbank Offered Rates (NIBOR) dropped sharply to an average of 3.9 per cent on Friday from 10 per cent a week ago following an injection of naira liquidity into the banking system.
A total of N454 billion in debt refund to state governments and matured treasury bills entered the system last week, raising liquidity and pushing down borrowing cost among lenders Reuters disclosed.

Traders said the central bank sold around N115.68 billion worth of open market operations treasury bills between Wednesday and Thursday, but the market remained sufficiently liquid to keep rates at below double digits. In the same vein, last week the central bank paid owed monies to state governments, which improved liquidity as did N49 billion distributed from Nigeria’s oil savings excess crude account.
Meanwhile, analysts at Afrinvest West Africa Limited have pointed out that considering the relatively high liquidity level in the system, sentiment in the Treasury Bills (TB) market was largely bullish all through the week as investors took advantage of the attractive yield environment.

Buy interest was noticed across all tenors but with more interest in shorter tenured bills while average TB yield stood at 19.2 per cent on Tuesday and declined to 18.8 per cent on Wednesday. Following a spike in liquidity on Thursday, buy sentiment on TB strengthened further as average yield further declined to 17.8 per cent on Friday.
“All through the week, investors’ interest remained centered on shorter tenored T-bills and this is expected to continue in the coming week, especially given the current system liquidity and closure of T-bills primary market for the year,” Afrinvest stated.
Lending rates could trade flat this week, traders said, as firms and banks close activities for the end of the year.

Bond Market Review
Activity level in the  bond market remained soft during the week as investors continued to favour shorter tenored instruments (T-bills) which currently offer attractive yields.
Nevertheless, performance of the bonds market was positive as average yield pared week-on-week across benchmark instruments to settle at 15.8 per cent on Friday.
Similarly, the FGN Eurobonds enjoyed buying interest during the week as average yield across all instruments declined from 6.4 per cent on Tuesday to close the week at 6.3 per cent with the JAN 2021 instrument being the pest performer. Performance of the Corporate Eurobonds was equally bullish as ACCESS 2017 and FIDELITY 2018 instruments fell 0.2% and 1.3% week-on-week respectively.

In the coming week, the DMO will conduct its last Bond auction for the year 2016. The instruments on offer are: JUL 2021 (N30 – 40bn on offer), JAN 2026 (N20 – N30bn on offer) and MAR 2036 (N30bn – 40bn on offer).
” In our view, the trend witnessed in the previous three consecutive bond auctions in which instruments were under allotted on account of higher range of bids will likely persist at the December auction. November 2016 Inflation report due for release this week will drive sentiment. Investors will be looking to see the pace of month-on-month Consumer Price Index (CPI) growth in setting trading strategy for next year. We project a flattish month-on-month movement but still expect Inflation rate to accelerate on year-on-year basis due to low base effect,” Afrinvest added.

Forex Review and Outlook
There was no new development in the foreign exchange market last week as the CBN maintained its daily $1.5 million intervention at a pegged rate of N305/$. Thus, the interbank spot rate was flat at N305/$ Liquidity however remained a bottleneck to performance of the FX market with spread between interbank and parallel rates ranging from N180/$ to N170/$.
Meanwhile, the parallel market remained volatile with exchange rate on the street opening at N484/$ (relative to N482/$ the preceding Friday), but depreciated to N485/$ by Friday.

Amid sustained concerns by investors about the direction of foreign exchange policy and the absence of decisive policy actions to restore confidence in the Nigerian economy, a former deputy governor of the CBN, Mr. Kingsley Moghalu noted in an article published by Financial Times during the week that restoring transparency in the market and a phased approach to structural reforms are key priorities for the central bank and other economic managers.
At the FMDQ OTC derivatives market, the value of FX futures opened contract increased by $73.2 million to $3.8billion from $3.7billion in the previous week. Strong interests were observed in the NGUS JUN 2017, NGUS JUL 2017 and NGUS AUG 2017 contracts which traded at N276/$, N272/$ and N269/$.