Rates Slow in October on Account of FAAC Payments

Rates at the primary market auction slipped considerably in October on the back of two months payments by Federation Account Allocation Committee (FAAC).
Cordros Asset Management Limited said, during the month of October, Primary Market Auction (PMA) stop rates fell from 10.85 percent, 11.69 percent, and 11.75 percent for 91, 182, 364-day Treasury Bills at the end of September to 10.80 percent, 11.58 percent, and 11.70 percent at the end of October.
Stop rates for Open Market Operation (OMO) Auction bills were more attractive at 12.1 percent for 69 to 182 days. Yields rose in the secondary market, with the largest spike coming around the 70-90 day tenors. Yields for 90-day bills rose from 10.65 percent to 11.95 percent over the period under review.
The money market was very liquid throughout the month of October, with an average liquidity of N550 billion. This is a contrast to the tight liquidity conditions witnessed in September due to the effects of the Central Bank of Nigeria’s (CBN’s) 50 percdent Cash Reserve Ratio (CRR) policy for public sector deposits in banks. Rates declined in October, as Federation Account Allocation Committee (FAAC) funds for both August and September were dispersed. CBN intervened in the market 10 times via Open Market Operations (OMO) in a bid to mop up the excess liquidity and manage inflation during the month.
Inflation declined by 20 basis points (bps) from 8.2 percent in August to 8.0 percent in September, the lowest rate reported this year. Inflation rates have remained in the single-digit territory, a key target of the CBN, since January 2013.
Cordros outlook for yields is that they will remain fairly stable for the remainder of 2013 with a downward bias as a series of maturities are expected in the fourth quarter, including Treasury Bills (N324 billion, PMA; N1 trillion, OMO) and N2 trillion worth of AMCON bonds set to mature on December 31, 2013. The apex bank has scheduled auctions that aim to mop up N324 billion of this liquidity.
“We expect the balance to be managed via OMO auctions and other interventionist policies”, said Cordros.

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