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Market rates spike over tight monetary stance

By Chijioke Nelson
15 February 2015   |   4:22 pm
S&P places sovereign rating on negative watch MONEY market rates were blown through the roof last week as the nation’s monetary policy stance remained largely contractionary.   The market had opened below N100 billion on the back of provisions made by the Deposit Money Banks (DMBs) for the Retail Dutch Auction System (RDAS) of the…

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S&P places sovereign rating on negative watch

MONEY market rates were blown through the roof last week as the nation’s monetary policy stance remained largely contractionary.

  The market had opened below N100 billion on the back of provisions made by the Deposit Money Banks (DMBs) for the Retail Dutch Auction System (RDAS) of the Central Bank of Nigeria (CBN) on Wednesday. 

  Already, CBN’s tight monetary policy stance saw the outflow of N28.07 billion from the system through the Open Market Operations (OMO) auction on Monday. 

  Consequently, the dearth of liquidity and the scramble for available one pushed rates higher, as Open Buy Back (OBB) and Overnight rates reached 53.3 per cent and 57.2 per cent on Monday and higher on Tuesday at 68.3 per cent and 73.3 per cent respectively.

  Afrinvest Securities Limited, in its weekly report, noted however, that there was a significant fall in money market rates on Wednesday as liquidity improved on the back of an estimated N30 billion inflow from the Subsidy Reinvestment and Empowerment Programme and the refund of unsuccessful RDAS bids. 

  Rates later settled at 11.6 per cent for the OBB and 12.1 per cent for the Overnight rates. 

   On Thursday, OBB and Overnight rates closed lower at 13.6 per cent and 14.3 per cent on the back of OMO maturity of N285 billion.

  But before the close of transactions on Friday, rates had resurged to a new high at 76.7 per cent and 80.2 per cent for OBB and Overnight respectively, with expectations that the volatility within the money market space would continue this week.

  Meanwhile, the bond market also remained bearish last week, as yields rose across all but three instruments, while prices declined, especially in short to mid-term instruments where selling activity was mostly concentrated. 

  The average yield on FGN bonds rose 87 Basis points (bps) week-on-week to 15.9 per cent, while yields on short to mid-term instruments rose 1.6 per cent week-on-week and longer dated maturities declined 0.3 per cent week-on-week.   

  “The broad increase in yields, especially in shorter term maturities was on accounts of investors’ concern on the weakening macroeconomic fundamentals, especially the deteriorating domestic currency and the political uncertainties. 

  “This culminated in the placement of Nigeria’s Sovereign Rating on a negative watch by S&P Ratings, a move which further doused sentiments for shorter term debt instruments and prompted sell-offs.

  “While we expect the bond market to benefit from the depressed outlook for equities with portfolio managers re-allocating funds towards an overweight on fixed income, we anticipate that yields may continue to trend higher in the near term. 

  “Nevertheless, we also foresee marginal moderation in yields next week and thus forecast a slight 10-20bps decline in average yields on the back of expected soft bargain hunting,” the securities company added.

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