Abundant banking-system liquidity fails to translate into stronger investor appetite for Treasury bills, Open Market Operation (OMO) and FGN bonds, raising questions about the CBN’s liquidity management strategy.
Nigeria’s banking system recorded a sharp liquidity expansion in October 2026, with system liquidity rising by 56.75 per cent to N7.373 trillion from N4.703 trillion in September, even as investor demand for government securities weakened across major segments of the fixed-income market.
The development highlights a growing divergence in the financial markets, where substantial funds are returning to the banking system but investors are becoming increasingly cautious about committing fresh capital to government securities.
The liquidity surge was largely driven by N9.051 trillion in OMO maturities that flowed back into the financial system, alongside N1.310 trillion in Treasury bill maturities, Federal Government bond coupons and other government-related inflows.
However, the Central Bank of Nigeria (CBN) absorbed N6.182 trillion through fresh OMO sales during the month, an amount insufficient to offset the volume of maturing obligations, contributing to the substantial increase in system liquidity.
Despite the expansion in available liquidity, investor appetite for government securities weakened considerably in October. Bid-to-cover ratios declined across Treasury bills, OMO and Federal Government of Nigeria (FGN) bonds, indicating reduced demand at primary-market auctions.
For Treasury bills, the bid-to-cover ratio fell to 2.19 times in October from 5.11 times in September, while OMO demand declined to 1.70 times from 3.69 times. Demand for FGN bonds also weakened, with the bid-to-cover ratio falling to 1.00 times from 1.49 times in the preceding month.
The decline in demand was accompanied by lower secondary-market trading activity. Treasury bill turnover fell to N3.91 trillion from N5.99 trillion in September, while OMO turnover declined to N16.76 trillion from N28.05 trillion. FGN bond turnover also dropped to N5.09 trillion from N6.96 trillion.
Consequently, borrowing yields moved higher across key segments of the domestic fixed-income market. Average Treasury bill yields increased by 28 basis points to 18.02 per cent, while average FGN bond yields rose by 23 basis points to 16.18 per cent.
The movement suggests that investors remained selective in their fixed-income allocations despite the substantial liquidity available in the banking system.
Further illustrating the changing market dynamics, both the CBN and the Debt Management Office rejected significant volumes of investor bids at their respective final October auctions, allotting below the offered amounts.
The development comes against the backdrop of a substantial increase in projected financial-system inflows for November. Total inflows are estimated at N13.787 trillion, compared with N13.495 trillion in October.
OMO maturities are expected to contribute N8.927 trillion, while Treasury bill maturities are projected at N1.919 trillion. Federal Government bond coupons are estimated at N323.154 billion, with FAAC distributions projected at N2.5 trillion.
The expected inflows could sustain elevated liquidity conditions, although their ultimate impact will depend on the extent of further CBN sterilisation through OMO operations.
Meanwhile, the broader macroeconomic environment presents additional considerations for monetary authorities. The naira depreciated by 0.87 per cent to N1,338.99 per dollar at the Nigerian Foreign Exchange Market (NFEM) window in October, despite reported CBN foreign exchange sales exceeding $3 billion during the month.
External reserves, however, strengthened to approximately $55 billion, supported by a favourable oil-price environment, as Brent crude gained 6.15 per cent to an average of $106.61 per barrel.
The developments leave the CBN with the challenge of managing rising domestic liquidity while maintaining exchange-rate stability and supporting investor confidence in the fixed-income market.
For banks and discount houses, the combination of higher system liquidity and elevated government security yields presents opportunities for treasury positioning, although weaker auction demand and changing yield expectations underscore the need for selective investment strategies.
As the market enters November, attention will focus on the CBN’s liquidity-management operations, the forthcoming Monetary Policy Committee decision and whether the projected N13.787 trillion in inflows will translate into sustained liquidity or be substantially absorbed through further monetary operations.
Ultimately, October’s market developments point to a critical question for Nigeria’s financial system: can abundant liquidity coexist with stronger investor demand for government securities, or will the CBN need to intensify its sterilisation efforts to maintain monetary and financial stability?
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Hope Moses-Ashike is an Associate Editor, Banking and Finance, with more than a decade of experience reporting on Nigeria’s financial system and broader economy. She closely tracks market movements, monetary policy decisions, company disclosures, regulatory actions, economic indicators, and global developments, and interprets what they mean for businesses, investors, policymakers, and households. Her reporting helps readers understand complex issues such as inflation trends, foreign exchange market dynamics, interest rate decisions, bank performance, and investment risks.
She also covers major international events and periodically travels to Washington, D.C., to report on the World Bank/IMF Spring and Annual Meetings.
Her dedication to financial journalism has earned her multiple recognitions and invitations to high-level professional development programmes. She is an alumna of the International Visitors Leadership Programme (IVLP) in the United States and holds an Advanced Financial Journalism Certificate from the Press Association Training in London, UK. Her other notable achievements include completing the Lagos Business School CMC Programme, the Bloomberg Media Africa Initiative Programme, and a Master Class in Journalism at Rhodes University in South Africa.
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