Nigeria: Short-term interest rates to trend low on over $2bln expected liquidity inflows

Zawya

03-03-2025

Nigeria's financial markets are poised for a significant influx of liquidity, with over N3 trillion expected to flood the system in the short term. This substantial liquidity injection is anticipated to have a profound impact on short-term interest rates, which are likely to trend lower as a result. The impending liquidity surge, driven by factors such as maturing treasury bills and bond repayments, is expected to increase the amount of money available for lending, thereby exerting downward pressure on short-term interest rates.
Dealers from Cowry Assets Management Limited in a note to investors observed that given these conditions, short-term interest rates are likely to remain under pressure, with investors closely monitoring developments in the fixed-income space for strategic positioning.
'Looking ahead, we anticipate a further decline in money market rates in the coming week as liquidity inflows continue to shape market dynamics. Another tranche of N1.7 trillion from FAAC allocations is expected to permeate the financial system, sustaining the current liquidity uptrend. Additionally, maturities worth N50 billion from Open Market Operation (OMO) bills and N1.27 trillion from Treasury Bills will enter the market, further bolstering liquidity levels, ' Cowry Assets Management stated.
Meanwhile, the Nigerian money market witnessed a significant increase in liquidity last week following a substantial inflow of N1.7 trillion from the Federation Account Allocation Committee (FAAC).
This excess liquidity led to a sharp decline in the Nigerian Interbank Offered Rate (NIBOR) across all tenors, reflecting reduced funding pressures among financial institutions.
Industry participants observed that the Overnight NIBOR saw the steepest drop, plunging by 438 basis points to settle at 28.54 percent.
Similarly, the one-month, three-month, and six-month NIBOR rates declined by 17 basis points, 36 basis points, and 84 basis points, respectively, highlighting the impact of the liquidity surplus in the interbank market.
The decline in market rates according to dealers, was also evident in the broader money market, as both the Overnight (OVN) rate and the Open Buy Back (OPR) rate moderated, closing the week at 26.75 percent and 27.33 percent, respectively.
This occurred despite the Debt Management Office (DMO) settling N910.4 billion worth of Federal Government bonds, which temporarily absorbed some liquidity from the financial system.
In the Nigerian Treasury Bills (NTB) market, the Nigerian Interbank Treasury Bills True Yield (NITTY) declined across most tenors,exceptf the one-month NITTY, which rose by 21 basis points. This suggests that investors are shifting focus towards short-term securities, likely in response to prevailing money market conditions and expectations of further liquidity inflows.
Meanwhile, the three-month, six-month, and twelve-month NITTY rates trended lower as market participants exited the secondary market in anticipation of an upcoming robust Primary Market Auction (PMA) for Treasury Bills this week.
The secondary Treasury Bills market saw a moderate bullish sentiment, as the average yield declined by 35 basis points week-on-week.
This downward movement in yields was largely driven by increased demand across various maturities, as investors sought to lock in favourable rates ahead of the expected liquidity surge.
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