CBN To Phase Out $40b OMO Bills Market

The Central Bank of Nigeria (CBN) will soon end the Open Market
Operation (OMO) Bills sales to investors. The policy shift could
hurt the market with its over $40 billion investment, according to
findings.

The market for OMOs had grown to about $40 billion by the end of
2020, data from Cairo-based investment bank, EFG Hermes, with
foreigners holding about a third.

CBN Director, Monetary Policy, Hassan Mahmud, said plans to
phase out the instruments “once current obligations have been
redeemed”. Mahmud, who spoke in an interview aired during an online
conference on Tuesday, didn’t give a time frame for the policy
implementation.

Mahmud, said the cost of liquidity management was getting too
high and issuance of OMO bills should be a transaction between the
central bank and commercial lenders.

“It’s not supposed to be for the public, but along the line the
transition broke and investors who were non domestic were investing
in OMO,” he said.

The debt sales handed foreign investors some of the best carry
returns in Africa, with many of the investors borrowing from low
interest markets, and investing in Nigeria where they got nearly 30
per cent returns in dollar terms.

The OMO offerings were introduced to help stabilize the naira
following the oil-price collapse in 2015.

The CBN had previously barred individuals and local non-banking
firms from buying high-yielding central bank bonds, a move designed
to stimulate bank loans for purposes other than market
speculation.

The two types of investors are excluded from buying open-market
operations, which are short-term central bank securities, the
Abuja-based regulator said.

Though the sales helped to shore up the currency, the debt has
become too burdensome to sustain as foreigners snapped up
securities that offered carry traders.

The CBN has reduced OMO issuance by 61 per cent in the first two
months 2021 compared with the same period last year, according to
data compiled by Bloomberg.

OMOs, which have maturities of less than a year, were created to
mop up excess liquidity in the banking system, but had been opened
to foreign investors to attract dollars since the 2015 oil-market
crash.

In October 2019, the CBN restricted OMO sales to banks and
offshore investors, barring participation of domestic institutional
investors and non-banking firms. That distorted the market for
Nigeria’s short-term debt, with yields on Treasury bills
collapsing.

OMOs maturing in February 2022 yielded around 8.5 per cent on
Tuesday, compared with three per cent for one-year Treasury bills
in the secondary market.

The Central Bank of Nigeria (CBN) will soon end the Open Market
Operation (OMO) Bills sales to investors. The policy shift could
hurt the market with its over $40 billion investment, according to
findings.

The market for OMOs had grown to about $40 billion by the end of
2020, data from Cairo-based investment bank, EFG Hermes, with
foreigners holding about a third.

CBN Director, Monetary Policy, Hassan Mahmud, said plans to
phase out the instruments “once current obligations have been
redeemed”. Mahmud, who spoke in an interview aired during an online
conference on Tuesday, didn’t give a time frame for the policy
implementation.

Mahmud, said the cost of liquidity management was getting too
high and issuance of OMO bills should be a transaction between the
central bank and commercial lenders.

“It’s not supposed to be for the public, but along the line the
transition broke and investors who were non domestic were investing
in OMO,” he said.

The debt sales handed foreign investors some of the best carry
returns in Africa, with many of the investors borrowing from low
interest markets, and investing in Nigeria where they got nearly 30
per cent returns in dollar terms.

The OMO offerings were introduced to help stabilize the naira
following the oil-price collapse in 2015.

The CBN had previously barred individuals and local non-banking
firms from buying high-yielding central bank bonds, a move designed
to stimulate bank loans for purposes other than market
speculation.

The two types of investors are excluded from buying open-market
operations, which are short-term central bank securities, the
Abuja-based regulator said.

Though the sales helped to shore up the currency, the debt has
become too burdensome to sustain as foreigners snapped up
securities that offered carry traders.

The CBN has reduced OMO issuance by 61 per cent in the first two
months 2021 compared with the same period last year, according to
data compiled by Bloomberg.

OMOs, which have maturities of less than a year, were created to
mop up excess liquidity in the banking system, but had been opened
to foreign investors to attract dollars since the 2015 oil-market
crash.

In October 2019, the CBN restricted OMO sales to banks and
offshore investors, barring participation of domestic institutional
investors and non-banking firms. That distorted the market for
Nigeria’s short-term debt, with yields on Treasury bills
collapsing.

OMOs maturing in February 2022 yielded around 8.5 per cent on
Tuesday, compared with three per cent for one-year Treasury bills
in the secondary market.