Cardoso signals return to orthodox monetary policy as T-bill yield doubles

…FPIs stage return

…Boost for naira as higher interest rate set to lure dollars

…Investors to rotate from stock market to fixed income

The Central Bank of Nigeria (CBN) has fired the latest signal of a return to orthodox monetary policy after doubling the yields on its one-year treasury bills.

The yield on the one-year Nigerian Treasury Bill jumped to 23.4 percent at an auction Wednesday in what could be a game changer for attracting foreign portfolio investors into the country.

The one-year bill was oversubscribed to the tune of N1.87 trillion, three times more than the N600 billion that was offered.

Nigeria sold a record N1 trillion worth of Treasury Bills at the auction. That’s the highest amount of cash raised via TBills in a single auction since the CBN started tracking data.

The latest move, coupled with reforms in the foreign exchange market, are signals that orthodox monetary policy management is back.

“With the true yield of the one-year bill at 23.4 percent, it is time for FPIs to come in,” a market source familiar with the matter said.

The current yield when matched with the latest inflation rate of 28.92 percent brings the negative real return on the one-year T-bill to 5.52 percent as against the previous negative return of 16.68 percent.

If matched against CBN governor Olayemi Cardoso’s inflation target of 21 percent for this year, it gives a positive real return of 2.45 percent.

“Investors asking up to 29.94 percent for the one-year bill is an indication that N0.8 trillion wanted more than 19 percent discount because of inflation,” the source said.

The one-year bill recorded a stop rate of 19 percent versus 11.54 percent at the last auction while the 182-day and 91-day bills had stop rates of 18 and 17.24 percent versus 7.15 percent and 5 percent respectively at the previous auction.

Not only will higher interest rates lure foreign portfolio inflows, it gives locals one less reason to speculate against the naira. Analysts say the dollars likely to be unlocked from this will help stabilise the naira in the FX market, bringing much-needed relief to the embattled currency.

“Investors, both local and foreign, will want to see consistency at the next auction but there’s no doubt this is a great step in the direction of luring them back in,” another market source told BusinessDay.

The higher yields on T-Bills as well as a series of measures by the CBN last week that enabled the naira to trade more freely against the dollar are expected to warm the hearts of investors and ease the pressure on the naira.

The naira gained on Wednesday, closing at N1418/$ compared to N1433.89/$ the previous day, according to data by FMDQ Securities Exchange Ltd.

The de facto devaluation of the naira at the NAFEX market last week has narrowed the gap with the black market to 2 percent.

“The higher yields on T-bills combined with the adjustment in the currency market are compelling enough to entice FPIs back into the market,” Gbolahan Ologunro, a portfolio manager at Lagos-based investment bank, FBNQuest said.

Ologunro said that the current happening is similar to that of 2016, when the CBN had to make naira assets very attractive to FPI just to bring dollar inflows into the market.

The improvement in interest rates on fixed income will cause short term correction in the stock market, according to analysts.

“With low risk assets providing more attractive yields, you would expect investors to reprice dividend yield upwards which means there’ll be a correction in the short term in the equities market,” Ologunro said.

Ayo Teriba, CEO of Economic Associates said that the yield on the one year T-bill supersedes the CBN governor’s projected inflation rate of 21 percent by the end of the year and agreed that it could indeed attract foreign portfolio investors back.

“If you benchmark the return with inflation expectation of 21 percent as said by the CBN governor from now to about one year, then this is real returns and that will attract foreign portfolio investors back into the county,” Teriba said.