OMO regulation impact fades out as yields advance

THE impact of the Central Bank of Nigeria’s (CBN’s) Open Market Operation (OMO) regulation that restricted participation of non-bank corporates from OMO transactions is gradually fading out as yields recover across segments of the fixed income market.

Nigerian Tribune investigations reveal that the increase in yields was driven by week on week (every week) auction of OMO instruments by the CBN; introduction of the CBN Special Bill; desertion of the fixed income market for the equity market.

Yields in the Federal Government of Nigeria (FGN) Bond market advanced in the first quarter (Q1) 2021 across tenors as the average yield increased to 9.39 per cent (as of March 16, 2021) from 6.12 per cent at the beginning of the year.

Dealers believe that given that system liquidity is expected to remain tempered as the CBN sustains OMO auctions with N34.0 billion worth of instruments expected to mature on April 6, 2021, it is expected that rates will remain subdued this week.

According to some dealers, yields in the Treasury Bill space will continue to rise as the government is positioned to borrow more in the year and the CBN continues to implement measures to contain liquidity in the banking system.

But like other fixed income instruments, yields in the OMO space are fast recovering.

The average OMO yield expanded to 6.89 per cent at the close of March 16 from 0.58 per cent at the beginning of the year.

The outcome in the OMO space is partly a result of the introduction of CBN Special Bill. Generally, the CBN has expressed its willingness to raise rates in the year.

Available records show that rising inflation rate might incentivize the CBN to auction more OMO instruments at higher rates in 2021.

Globally, yields on 10-year government bonds moved upwards in major economies in 2021Q1.

Central banks’ decision on interest rate, breakthroughs in the development of COVID-19 vaccines and inflation expectations are some factors that led to upward yields movement.

Yields on 10-year government bond inched closer to double-digit for major economies in Africa.

While the impact of COVID-19 affects market confidence across countries, some markets still defy all odds, said dealers from FSDH Merchant Bank.

Overall, the FGN Eurobond market was bearish last week as market sentiment remains soft on the back of the rising US treasury yields stoked by inflationary concerns and crude oil price concerns.

At the close of the week, average benchmark yields rose by +4.09 per cent to close at 6.61 per cent at the end of the week.

For the FGN Eurobond market, “we expect the market to continue to react to the news both on the domestic level and international level especially to movement in crude oil prices and the US treasuries will respond to President Biden’s $2 trillion plan,” one analyst said.

The federal government is positioned to borrow N5.6 trillion to finance the 2021 Budget which potentially could be higher at the end of the year as revenue remains constrained.

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