• Thursday, March 28, 2024
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Rising inflation, Institutional investors push for higher yields on Treasury Bills, Bonds

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Rising inflation in Nigeria is making institutional investors demand higher high yields (returns) on treasury bills and bonds on offer from the Central Bank of Nigeria (CBN) and the Debt Management Office (DMO). The search for higher returns has resulted in investors shunning securities with low yields that do not match the rate of inflation in the country.

Data from the National Bureau of Statistics (NBS) released on Thursday 15, December showed that the country’s inflation climbed to a new 11 year high of 18.5%, the 13th consecutive month in which inflation kept rising in the country. Month on Month inflation has slowed down, indicating that the consistent rise in inflation is losing steam. Nonetheless, institutional investors are pushing the CBN and the DMO to raise instruments on debt instruments to compensate for the erosion in the purchasing power of the naira.
At an auction by the debt management office (DMO) on Wednesday, December 14, 2016, investors largely shunned the bonds with low yields and instead bought bonds offering higher yields closer to the inflation rate.
The DMO had proposed to raise N95 billion from the auction of its bonds with maturities of 20 years, 10 years and 5 years, but could only raise N69.2 billion, which is a constraint to the plan by Africa’s biggest economy to spend its way out of its present economic slump.
Analysts say that the government could not match the demands of investors for high yields, as it feared an attendant rise in government’s debt service cost, a situation that led to a reduction by 27 per cent, the cash expected from the bond sales.
“What happened was that the investors quoted the yields they are willing to accept, but the DMO was not ready to match it and that led to lower allocation to investors who quoted yields that the DMO was willing to accept,” said Austin Ejola, Vice president at Planet Capital Limited who over sees the bond and fixed income desk of the investment banking firm.
Austin said that the fear of rising inflation is a critical factor that caused the investors to demand for higher yields of up to 18 per cent.
Analysts say that the yield they demanded as an appropriate reward to them considering that inflation had risen to 18.5 per cent by Thursday according to data released by the National Bureaus of Statistics, saying that many investors are not willing to lock up their funds at present levels.
The average coupon on the bonds eventually stood at 16.22 per cent, 1.22 percentage points above what the DMO offered for similar bonds in last month’s auction as it paid 16.43 per cent for the 20 year bonds, 16.24 per cent on the 10 year bonds, and 15.99 per cent for the 5 year bonds.
DMO raised N41 billion from the bonds maturing 2036, N25 billion from the bonds maturing 2016, and N3.2 billion from the bonds maturing 2021, which also had the lowest yields.
Total subscriptions at the auction on Wednesday reached N102.84 billion, but just N69.2 billion was eventually allotted in a bid to keep yields low.   
At a similar auction held by the CBN on Wednesday, investors also showed a preference for treasury bills offering higher yields than those with lower yields.
Total subscriptions at the Treasury bill auction stood at N185.97 billion, up from N156.56 billion at the previous sale last month, data from the central bank showed.
The CBN sold three-month treasury bills at 14 percent to raise N39 billion and offered 17.50 percent for six-month bills, which fetched N23.02 billion. It paid 18.68 percent for the one-year bill worth N85.46 billion.
 
The CBN raised a higher amount than planned in a bid to compensate for the DMO’s inability to raise more money due to the lower yields on its offer.
The apex regulatory bank raised N147.48 billion ($484 mln) at the Treasury bill sale, higher than the N83.24 billion naira it originally advertised.

President Buhari on Wednesday proposed a seemingly expansionary budget of N7.298 trillion with a deficit of N2.3 trillion as the government tries to rescue the economy from biting recession through high spending, which will be supported by domestic and external borrowing. With debt service to consume N1.7 trillion in 2017, the government would be keen at keeping interest rates on its domestic debts low. But rising inflation, forecasted to touch 20% by March 2017 is making it difficult to achieve low interest rates.