Foreign portfolio investors (FPIs) displayed increased interest in Nigeria’s Open Market Operation (OMO) bills in November, driven by appealing yields and a strategy to boost investment returns.
Despite conflicting signals from other important market indices, the increasing demand for naira-denominated assets coincides with economic reforms and sustainable growth. As major central banks have lowered interest rates in response to lessening inflationary pressures, a global trend towards safe-haven assets has arisen.
Increased Dollar Liquidity and Positive Market Outlook
The Central Bank of Nigeria (CBN) attributed the boost in U.S. dollar liquidity to increased foreign currency inflows, reflecting FPIs’ positive assessment of Nigeria’s financial landscape. This development comes ahead of Nigeria’s planned $2.2 billion Eurobond issuance, which analysts predict will be oversubscribed due to the country’s attractive interest rates.
At the recent CBN OMO auction, investor demand far outstripped supply. While the CBN offered N300 billion across 91-, 182-, and 364-day notes, bids totaled an impressive N1.5 trillion, demonstrating strong interest in longer-term instruments.
Investor Focus on Long-Term Instruments
Detailed auction results showed that the 364-day OMO bills dominated investor interest. While the CBN initially offered N250 billion for this tenor, bids reached N1.5 trillion—a bid-to-offer ratio of 5.8x. Reflecting this demand, the central bank allotted the entire N1.5 trillion to investors, which included both local banks and FPIs.
Short- and medium-term tenors, however, saw no demand. The stop rate for the 364-day OMO bills remained unchanged at 24.3%, maintaining its level from the previous month.
Naira and FX Market Dynamics
The interbank market witnessed robust liquidity last week, supported by foreign inflows from FPIs, exporters, and the CBN’s interventions. Cordros Capital noted FX inflows from FPIs in anticipation of the OMO auction, with the central bank reportedly selling $116 million at exchange rates ranging from N1,655 to N1,660.
Despite these inflows, the naira faced downward pressure, declining by 1.21% to close the week at N1,672.69, due to heightened demand.
Analyst Insights on Auction Performance
Investor preference for long-term instruments was evident, with subscriptions for the 364-day OMO bills totaling N1.45 trillion—a bid-to-offer ratio of 4.83x, according to CardinalStone Limited. The CBN ultimately allotted N1.447 trillion for the 364-day tenor, leaving short- and medium-term instruments without any subscriptions or allocations.
The persistent demand in long-term OMO bills emphasises how attractive Nigeria is to yield-hungry investors and how crucial the CBN is to controlling market liquidity and preserving investor confidence.
