Despite their fundamental similarity as short-term government debt instruments, Open Market Operations (OMO) bills consistently trade at different yield levels compared to Nigerian Treasury Bills (NTBs).

This variation, a subject of ongoing discussion among market analysts, stems from a key regulatory distinction: access to primary OMO auctions remains limited to commercial banks and foreign investors, a policy introduced several years ago.

OMO bills have its own unique identity, separate from other securities or instruments in the money market. They are strictly issued by CBN for liquidity management to achieve price stability.

Last week, the Central Bank of Nigeria (CBN) released its financial report for 2024, Cardoso’s first report as CBN governor.

The cost of CBN securities, open market operation (OMO) bills, issued increased from N1.51 trillion in 2023 to N4.48 trillion in 2024 as rates on OMO- bills peaked to record high of 32.04 percent due to consistent rate hike by the CBN.

The instruments issued by the CBN to mop up liquidity (and attract FX from foreign portfolio investors continue to increase. The increase in bills and rates contributed to the threefold increase in interest costs in 2024.

Higher rates on OMO-Bills spur offshore investors and the banking sector’s interest in treasury bills.

Despite talks of a return to orthodox policy by the current apex bank governor, one of the last standing policies still practiced from Emefiele’s regime is the restriction of only banks and foreign portfolio investors’ participation in OMO auctions.

In October 2019, then Godwin Emefiele-led CBN introduced a policy restricting access to OMO bills to only banks and foreign investors, effectively locking out non-bank financial institutions (NBFIs) such as pension funds, asset managers, and insurance companies.

This move created a rate divergence where OMO bills consistently offer higher yields than Nigerian Treasury Bills (NTBs), despite both securities being functionally identical.

By late 2019 through 2020, OMO became a premium, and the spread between it and treasury bills widened, from very little to a minimal spread in the earlier months of 2019, according to research by BusinessDay on data on government securities by CBN.

This was because yields on OMO yields remained elevated while T-bills fell sharply after the central bank switched monetary policy from fighting inflation and attracting foreign portfolio inflows to boosting domestic credit despite persistent high inflation, a deviation from the orthodox approach.

Last year, the CBN’s hawkish stance repaired the transmission mechanism. This made primary auction rates inch closer to or near the monetary policy rate (MPR).

The spread gradually narrowed, with T-bill rates rising closer to OMO levels. In 2023, the spread widened again as OMO yields surged in anticipation of tightening, outpacing the rise in T-bills.

By 2024 and into early 2025, the spread narrowed substantially, with both yields converging. This reflected a more synchronized and less segmented monetary policy stance and suggested improved market alignment and reduced rate distortion.

Wale Smith, a financial analyst, wrote in his ECO215 article that this persistent divergence, where two distinct markets exist for essentially the same security with significantly different pricing, contradicts the principles of orthodox monetary policy.

“It is a lingering legacy of the Godwin Emefiele era. As I will argue later, the time has come to eliminate the multiple interest rate tier regime,” Smith said.

“In my view, the bifurcation of Nigeria’s debt market has outlived its usefulness. It distorts market pricing, undermines efficient liquidity management, disadvantages domestic institutional investors, and weakens monetary policy transmission,” he said.

Analysts said the rule did not exempt foreign portfolio investors because they hold a significant amount of OMO bills, and a move to restrict them could have impacted the foreign exchange market.

Currently, outstanding OMO bills amount to NGN16.2 trillion (USD10.8 billion), However, detailed information regarding the distribution of these holdings between domestic banks and offshore investors remains limited.

Analysts at CardinalStone said in its recent report that the rise in interest expense on these issued securities is consistent with CBN’s aggressive liquidity tightening aimed at curbing inflation, and deliberate efforts at improving the frequency and attractiveness of OMO issuances to attract needed foreign inflows.

“I hope Cardoso remains cautious and avoids pushing liabilities to unsustainable levels, like we saw in 2019 when OMO obligations nearly matched the country’s entire FX reserves at $40 billion,” a Lagos-based analyst said.

Many analysts say it’s high time the current apex governor removes the dichotomy so that, regardless of whether FPIS choose to invest, lending does not occur at elevated interest rates, and also achieve a stable exchange rate.

Smith also mentioned that if offshore investors need to sell—a development likely to occur under a disorderly exit scenario—the continuing market bifurcation works against a potential pressure release valve in the form of non-bank FIs, as domestic banks would be unable to absorb the shortfall.

“Since the reduction in FX revenue from Nigeria’s major source, crude oil, due to low production among others. The government has sought other means to get FX, part of which includes OMO,” Smith said.