Not a single trade was done in the Treasury bills (T-bills) market last Friday as investors sought clarity over a directive from the Central Bank of Nigeria (CBN) banning individuals and local non-financial firms from buying short-dated government securities.
The directive is part of efforts by the CBN to boost lending to the real sector which has dried up since an economic recession in 2016. With economic growth still fragile and below population growth rate, lenders and investors have preferred parking cash in the high-yielding T-bills rather than lend to or invest in the real sector.
Even companies and individuals who had never traded fixed income became sold on the idea of earning a big return.
Yields on T-bills have moderated to 13 percent on average this year, since hitting a peak of 22 percent in 2016, thanks to a change of tack by the government to borrow less domestically.
However, with the persistent risks in the economy, as reflected in the stock market which is down some 16 percent, local investors are happy to take 13 percent on risk-free fixed income government securities.
The situation, which the CBN says is hampering economic growth by curbing credit flow to the real sector, forced it to introduce a raft of policies targeted at reducing demand for T-bills. That way, the apex bank is convinced it can force lending to the real sector and reduce private sector crowding-out, thereby boosting the economy which could only expand a miserly 2 percent in the first half of 2019.
Whether the CBN can trigger economic growth by restricting demand for T-bills remains to be seen.
“The CBN’s actions show its days of playing Father Christmas by offering high yields to local investors are over,” said Dipo Ajayi, head of fixed income trading at Lagos-based investment bank, Chapel Hill Denham.
“The market lull to be created from forcefully reducing demand for T-bills could be a boon for corporates looking to raise debt, because they can sell commercial papers at a cheaper rate to investors holding idle funds that would have been used to buy T-bills,” Ajayi said.
According to Ajayi, who says the level of inactivity in the T-bill market on Friday was the worst he had seen in his 15 years of trading fixed income, the lull will continue until at least after a primary auction Wednesday.
“That’s if the CBN doesn’t publish another circular clarifying its earlier directives,” he said.
Traders have decided to hold their guns until they get better clarity over the directive which the CBN was yet to formally communicate as of Friday.
Two fixed income traders told BusinessDay they didn’t want to fall on the wrong side of the policy and so will wait until Wednesday to get a clearer idea on the direction of interest rates.
“The stop rate will be used to gauge where the CBN wants interest rates to be,” one of the traders said.
Meanwhile, a Bloomberg report quoting an interview with CBN spokesperson, Isaac Okarafor, said the move to ban individuals and local non-financial institutions from trading T-bills is because the apex bank doesn’t want to leave room for “arbitrage” and wants to discourage banks from giving loans to “speculators” who want to buy government securities instead of investing in the real economy.
“The problem with that is by banning local non-financial institutions from the market, the banks can’t find natural counterparties to trade with and that has frozen the market,” a local pension fund manager told BusinessDay.
That’s because local corporates that usually serve as counterparties are no longer able to access the primary or secondary market, the fund manager said.
“The zero activity on Friday has never happened since at least 2007 when fixed income trading became liquid. However, the lack of activity will create a liquidity glut that could benefit corporates looking to raise debt,” he said.
Cardinal Stone analysts said in a note to clients on Friday that the restriction of local corporates and individuals from participation in OMO is positive for borrowing costs (for corporates and the FGN) as yields are likely to moderate in the near term.
“The clear delineation of OMO from other money market instruments also allows the CBN to attract FPIs with higher rates (for currency management) at a lower cost as the OMO sales are likely to reduce with the restriction placed on domestic non-bank investors,” the analysts said.
The team of analysts, led by Phillip Anegbe, also said the restriction of key corporates, such as PFAs and insurance companies, from participation in OMO is likely to free up excess investable cash for allocation to assets beyond fixed income alternatives.
“We see legroom for some flows into fundamentally strong equity names as treasury yields moderate. Our view is also buttressed by the high earnings and dividend yields in the equity market space,” the Cardinal Stone team, which includes Michael Nwakalor and Jerry Nnebue, noted.
For context, while some select names (especially within the tier-1 banking space) boast earnings yield in excess of 30.0 percent, the yield on the one-year T-bills is at 13.37 percent. In addition to this, tier-1 banks are averaging dividend yields of 10.9 percent.
High dividend yields are likely to attract institutional investors such as PFAs, as the potential for capital gains in fundamentally sound stocks further enhances the appeal of the equity market.
LOLADE AKINMURELE
