The Central Bank of Nigeria (CBN) took N4.72 trillion from investors through Open Market Operations in two days after demand for its short-term securities reached N8.62 trillion, more than four times the N2 trillion initially placed on offer.
The scale of the bids recorded on August 26 and 27 showed the depth of funds seeking high-yielding naira assets as the apex bank intensified efforts to keep excess money from building up in the financial system.
Four maturities were sold during the period, ranging from 96 to 152 days with rates between 19.32 percent and 19.90 percent.
Demand was particularly concentrated in securities that allowed investors to retain the prevailing returns for a longer period.
For the 132-day instrument, the CBN initially sought N500 billion but received bids worth N3.478 trillion.
That represented almost N7 of demand for every N1 originally offered.
Faced with the volume of subscriptions, the central bank increased the amount sold to N2.183 trillion at a stop rate of 19.65 percent.
The 152-day instrument produced a similar result a day later.
Investors offered N3.294 trillion for another N500 billion issue, while the CBN accepted N1.768 trillion at 19.32 percent.
Together, those two maturities attracted N6.77 trillion.
That means approximately 79 percent of all the money investors attempted to place in the four OMO instruments was directed towards the two longest maturities.
Demand at the shorter end was considerably smaller.
The 97-day instrument attracted N783.49 billion and resulted in an allotment of N613 billion at 19.90 percent.
Investors subsequently submitted N1.067 trillion for the 96-day paper, but the CBN accepted only N160.46 billion at 19.85 percent.
Across all four maturities, the N8.62 trillion submitted by investors exceeded the original N2 trillion offer by N6.62 trillion.
The CBN also eventually accepted N2.72 trillion more than it had initially planned to sell.
The difference indicates that the central bank was prepared to take advantage of exceptionally strong demand to remove more money from circulation than the headline auction size suggested.
Open Market Operations are one of the instruments available to the CBN for controlling the quantity of money within the financial system.
By selling the bills, the central bank receives naira from investors and temporarily removes those funds from circulation until the securities mature.
The latest intervention comes at a time when substantial liquidity is competing for investment opportunities across Nigeria’s financial markets.
That abundance of funds has become increasingly visible in primary-market auctions.
On August 26, investors separately submitted N3.79 trillion for Nigerian Treasury Bills when the Federal Government offered only N700 billion.
The 364-day Treasury bill accounted for N3.63 trillion of those bids despite only N500 billion being offered.
Its stop rate declined to 17.15 percent.
Taken together, the OMO and Treasury bill auctions conducted around the same period attracted more than N12 trillion in bids.
The amount provides a clearer picture of the volume of capital currently seeking short-term naira-denominated securities.
It also creates an unusual environment for monetary policymakers.
The CBN is maintaining restrictive financial conditions to contain inflation and protect currency stability, but investors and financial institutions continue to hold enough liquidity to oversubscribe fixed-income auctions several times over.
Offering attractive returns allows the central bank to draw some of that money away from immediate circulation.
At the same time, intense competition among investors for the securities gives the CBN greater room to determine how much it wants to absorb and at what price.
The latest auctions provide evidence of that pricing power.
Investors overwhelmingly preferred the 132-day and 152-day instruments even though their stop rates of 19.65 percent and 19.32 percent were below the rates available on the shorter securities.
The 96-day and 97-day bills cleared at 19.85 percent and 19.90 percent respectively.
Investors therefore committed considerably more money to the longer instruments while accepting lower annualised returns.
One possible explanation is that some investors are choosing to secure current yields for longer rather than repeatedly reinvest money in shorter securities.
The same preference for duration has appeared in the Treasury bill market, where demand has been heavily concentrated in the 364-day instrument.
The pattern becomes particularly relevant if market interest rates eventually begin declining.
Investors already holding longer-dated securities would continue earning the rate secured at purchase until maturity, while newly issued instruments could offer lower returns.
However, the volume of money entering central bank and government securities also raises questions about capital allocation across the broader economy.
A financial institution able to earn close to 20 percent on short-dated central bank instruments must compare that return with the additional risk involved in lending money to companies and households.
Similarly, investors deciding between fixed income and equities must consider the return available from relatively low-risk securities.
The competition for capital could therefore influence bank lending, corporate financing and investment flows into the Nigerian Exchange as long as yields remain elevated.
Access to the OMO market has also been widened.
Under changes introduced by the CBN in August, eligible individuals, companies and non-bank financial institutions can participate in primary and secondary OMO transactions through deposit money banks.
A broader investor base potentially increases the pool of capital competing for the instruments and strengthens the CBN’s ability to use OMO sales to influence liquidity.
The central bank will nevertheless have to continue managing funds returning to investors as previously issued securities mature.
Money removed from circulation through an OMO auction is temporary. At maturity, the principal is returned to investors, creating another injection of liquidity unless it is reinvested or sterilised through fresh instruments.
That creates a continuing cycle in which large maturities can release trillions of naira back into the market before subsequent auctions absorb part of the money again.
The August auctions demonstrate the scale at which that process is now taking place.
For every N1 of OMO securities initially offered across the four auctions, investors submitted more than N4.
And rather than limiting sales to the N2 trillion advertised, the CBN ultimately took N4.72 trillion.
With investors continuing to compete aggressively for both OMO bills and Treasury securities, Nigeria’s fixed-income market is entering September with abundant liquidity on one side and an increasingly aggressive central bank liquidity-management operation on the other.
