Fixed-income investors seeking high-yielding securities in the light of the prevailing developments in the markets might be disappointed in the next two months as market analysts expect rates on Federal Government short-term debt instruments to drop further.
A BusinessDay poll of five market analysts reveals expectations for rates on the less risky government Treasury Bills (T-bills) to decline to 8 percent or less before the end of September.
After hitting more than 17 months-high at 9.75 percent in May, yields on the Federal Government risk-free treasury bills dropped marginally to 9.15 percent in June. Analysts expect the rate to decline further on account of the maturing treasury bills in August. Stop rates had plunged to a four-year low of near-zero percent in 2020.
“Rate is expected to remain low,” Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham, said.
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According to Ebo, this is because “We are expecting huge maturity next month, hence will increase buying interest.”
The Central Bank of Nigeria (CBN) plans to issue a total of N722.17 billion treasury bills in the third quarter of 2021, as the same amount will be maturing between June 2021 and August this year.
The amount the apex bank plans to issue is 26.61 percent higher than N570.39 billion offered in the second quarter (Q2) 2021, and 12.12 percent below the N821.8 billion issued in the corresponding quarter of 2020.
The breakdown of the T-bills programme the CBN will be issuing in the next three months showed that it consists of N41.36 billion for 91-day bill, N151.13 billion and N529.68 billion for the 182-day and 364-day bills, respectively.
The CBN issues Treasury Bills at least twice a month to help the Federal Government fund its budget deficit, support banks in managing liquidity in the system and curb inflation.
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“Yields will continue to decline to about 8 percent because of the maturing bills and the fact that there will be sustained increase in demand,” Ayorinde Akinloye, investment research analyst at United Capital, said.
Since attaining almost two-year high in the week ended May 14 2021, rates on the government treasury bills have declined four consecutive weeks to settle at 9.15 percent, as compiled from Nigerian Treasury bills primary market auction Results for June 30, 2021.
While investors bid at a rate as high as 10 percent for the 91-day bill, 12.99 percent and 10.8 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria settled at 2.5 percent, 3.5 percent and 9.15 percent, respectively.
Stop rates for the 91-day & 182-day bills have remained unchanged for most of this year but the 364-day has been declining since the third week of May.
According to Akinloye, the high demand that is chasing after the bills the CBN has been issuing is the reason behind the drop in rates.
“Demand has been higher than supply and that has allowed the CBN a window to reduce the stop rates, it could have declined further if CBN didn’t oversell the auction as it has done over the four auctions,” the investment analyst said.
Analysis of the T-bills auction result for the week to June 30 showed that investors were chased after the bills the CBN sought to raise with more money than the apex bank was willing to raise.
The CBN raised N163.55billion from the last T-bills auction, investors were willing to invest N446.01 billion, almost three times more than the amount the apex bank raised at the primary market. The CBN had initially planned to issue N81.74 billion but following the high demand, it allotted N163.55 billion more.
Breakdown of the auction result revealed that investors were more interested in the longer 364-day bill with the highest interest rate than the shorter 91-day and 182-day bills.
While the 364-day with a much higher interest rate was oversubscribed by N277.81 billion, the 182-day was oversubscribed by N1.82 billion and the 92-day bill was oversubscribed by N2.83 billion.
The CBN planned to raise N2.88 billion for the shorter 91-day bill but investors were willing to subscribe with N5.03 million. The apex bank eventually issued N 2.2billion, N680 million more than the CBN’s initial offer. The amount raised by the CBN through this paper was N680 million less than the initial amount the CBN sought to raise.
Investors were willing to bid with N5.13 billion for the N20 billion offered for the 182-day bill, N14.87 billion less than what the CBN offered to investors.
The apex bank eventually raised the initial N3.31 billion, investors recorded N1.82 million worth of unsuccessful transactions. The CBN on the other hand raised N16.69 billion less than of its initial offering.
While the CBN offered to raise N58.86 billion through the longer 364-day Treasury bill, investors said they were willing to invest N435.85 billion. The apex bank later raised N 158.04, N99.18 billion more than its initial offer. Investors reported N277.81 worth of unsuccessful bids.
The declining treasury bill rate means investors have little to cheer about Nigeria’s second consecutive slowdown in the inflation rate.
When May inflation of 17.98 percent was adjusted against the 9.75 percent yield on the 364-day bill, it resulted in -8.23 percent real return but with the decline in the same bill to 9.4 percent, real negative return increased marginally to 8.58 percent.
Nigeria’s high inflation rate coupled with the declining stop rates put the country’s local investors investing in government instrument at a disadvantage when compared with their African peers.
With 9.213 percent T-bill rates in Kenya, fixed-income investors in East African country recorded a real return of 3.31 percent. March inflation in the region’s largest economy stood at 5.9 percent.
While interest rates have always been high in Nigeria due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and OMO bills as a means of attracting the US dollar to stabilise the Naira, the recent OMO policy by the central bank that prevents domestic investors from participating in the auction has sent yields to its worst record.
From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auctions at both the primary and secondary market. The CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.
The CBN policy sent yields on government instrument to their record-low levels, and as a result, investors reported a negative return in real terms amid the country’s rising double-digit inflation rate.
But the increase in OMO bill rates led to the uptick in treasury yield from near zero percent in late 2020 to 9.7 percent. Analysts say it is the benchmark rate for determining T-bill rates as OMO is usually higher than rates on the government less risky instrument.
Weeks after the Central Bank of Nigeria (CBN) shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest levels seen in almost a year, fixed-income investors demanded higher rates for T-bills.
“The increase in the stop rates can be linked to the hike in CBN OMO rates some weeks ago. Investors are bidding at higher rates and the DMO also needs to raise the cut-off rate to fill some of the orders,” a Lagos-based market analyst said in the last trading week of January.
