Funding Rates Ease over Robust Liquidity in Banking System

Funding Rates Ease over Robust Liquidity in Banking System

Funding rates eased below 27% as a result of excess liquidity in the financial system, reversing deposit money banks’ (DMBs’) persistent borrowing from the Standing Lending Facility of the Central Bank.

Open repo and overnight lending rates dropped significantly week on week in the absence of funding pressures despite aggressive liquidity mop-up activities by the Central Bank. The financial system was bolstered by huge inflows from expired OMO bills, as well as significant inflows from FAAC to states, in addition to other statutory revenue allocations.

However, the Central Bank of Nigeria (CBN) sterilised a significant portion of these inflows through two OMO auctions, absorbing N1.19 trillion across two main auctions conducted for short-term instruments.

Analysts noted that despite the aggressive mop-up, liquidity levels remained robust, with the market closing the week at a net long position of N1.52 trillion as against N159.40 billion in the prior week.

The surge was further reinforced by heightened placements at the CBN’s Standing Deposit Facility (SDF), where the weekly average climbed to N1.20 trillion, analysts at Cordros Capital Limited reported in a note.

Analysts noted that the amount was nearly three times the previous week’s N419.77 billion. Barring any mop-up activity by the CBN, the market anticipates that upcoming OMO maturities of N459.60 billion will boost system liquidity.”

With funding conditions improvement, interbank rates trended lower across the curve. The Overnight NIBOR declined by 197 bps week-on-week to settle at 26.78%, while the 1-month, 3-month, and 6-month benchmarks all moderated by 178 bps, 184 bps, and 182 bps to 27.39%, 28.16%, and 28.78% respectively.

The open repo and overnight lending rates slipped by 240 basis points (bps) and 220 bps to close at 26.50% and 26.95%, reflecting the liquidity comfort in the system. However, activity in the secondary market revealed that investors remained keen on extracting higher returns, which fed into an upward repricing of the NITTY curve across most short- to mid-term tenors.

The 1-month NITTY rose by 24bps to 16.37%, while the 3-month and 6-month benchmarks firmed by 95bps and 8bps to 17.68% and 18.45% respectively, according to Cowry Asset Limited. Analysts said only the 12-month maturity bucked the trend, sliding by 31bps to 20.43% as investors shifted focus towards the shorter end of the curve.

“… the liquidity relief may prove short-lived as the CBN is expected to actively mop up excess liquidity through auctions and the standing deposit facility window, a move that could tilt market rates higher,” Cowry Asset Limited said in a projection for the new week. The firm highlighted that a total of N324.41 billion in Treasury bill maturities is expected to hit the system, potentially providing temporary liquidity support.

Nonetheless, with the apex bank already set to float N480 billion worth of fresh supply across the 91-day, 182-day, and 364-day tenors, analysts said they expect upward pressure on market yields to persist, reflecting the delicate balance between liquidity injections and tightening actions. #Funding Rates Ease over Robust Liquidity in Banking System How to Make Money from Stocks, Forex or Cryptocurrency Trading