The decision to participate in a liquidity surge

The decision to participate in a liquidity surge.

Splitbox Journal • Decision Journal

Banks hold N6.98 trillion in idle cash. The central bank is attempting a mop up that functions as a net injection.

The state will offer N800 billion in Treasury Bills this Wednesday. Most of this sits in the 364 day instrument. A disciplined allocator must look past the headline yield. We face a decision tree rooted in net liquidity. The system receives N2.813 trillion in total inflows this week. This is not a withdrawal. It is a N1.3 trillion leak.

Bidding for one year bills assumes this liquidity surge will not trigger currency debasement by Q1. If inflation remains steep, locking capital into a 364 day tenor is a yield trap. Staying liquid in the Standing Deposit Facility offers safety but guarantees a negative real return as the money supply expands.

Avoid the duration risk of the 364 day bill. We prefer to maintain liquidity or rotate into equities. The NGX market capitalization has reached N164.9 trillion. The choice is between a nominal return today or the capacity to capture yields when the true cost of this surge is priced.

Commitment to duration requires a stable monetary base. This net injection contradicts that stability.

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— Splitbox Journal