Investors interest rise in Nigerian government securities

One year Treasury bill rate rose to 9.9 percent per annum in February 2023 after falling to 2.29 percent per annum previously, indicating high demand for government securities by investors.

This resulted in narrowing the negative real rate of return on investment, according to Bismarck Rewane, managing director/chief executive officer of Financial Derivatives Company Limited.

In his March 2023 presentation at Lagos Business School (LBS) he said that effective interest rates are now reflecting the Central Bank of Nigeria (CBN)’s monetary tightening policy.

Treasury bills as defined by UBA Group are short term investment securities issued by governments to finance national borrowing requirements.

Data from the CBN showed that treasury bills rate increased to 6.5 percent in November 2022, highest since 2019.

“Increase in treasury bill rate means that investors are demanding higher returns for government securities,” said Uche Uwaleke, professor of Capital Market at the Nasarawa State University Keffi.

This development is partly influenced by the high inflation environment and tight monetary policy stance by the CBN.

What is obvious is that the country’s fiscal deficit is deteriorating and so the government will have to use attractive interest rates to ensure that investors take up any security it issues to raise money to finance the deficit whether in the money market or capital market.

When rates on government Securities rise, it makes it more difficult for the private sector to raise cheap funds since companies will have to issue securities at rates higher than that of the government if they must succeed.

So, it increases the cost of capital for firms, which negatively impacts their earnings. It’s not surprising therefore that the stock market is negatively affected as fund managers tend to switch from equities to fixed income securities.

Higher cost of funds on the part of firms could equally contribute to higher inflationary pressure as the cost of commodities rise.

Taiwo Oyedele, head of tax and corporate advisory services at PwC Nigeria, said treasury bills rate rose towards the end of 2022 in response to sustained interest rate hikes by the central bank and generally in line with rising yields on fixed income securities.

The rate however remained much lower than inflation rate resulting in negative real returns. This has further been aggravated as T-bills rates are now lower partly due to expectations that the Monetary Authorities will be less hawkish going forward and also due to the non-refinancing of recently matured government securities fuelling excess liquidity in the system.

This trend may help attract capital to the private sector and the capital market at least in the short term, he said.

The CBN has said it would issue a total of N1.14 trillion treasury bills in the second quarter of 2023 as the same amount will be maturing between March and May, this year.

Africa’s largest economy’s big bank disclosed this on Nigeria’s treasury bills programme released on its website on Wednesday.

A breakdown of the treasury bills programme to be issued in the next three months, which represents the amount that would mature during the same period, consists of a total of N23.67 billion for 91-day tenor, N34.70 billion for 182-day tenor and N1.08 trillion for 364-day tenors.

The CBN issues Treasury Bills twice in a month to help the Federal Government fund its budget deficit, support banks in managing liquidity in the system and curb inflation.

Nigeria’s inflation rate increased to 21.82 percent in January 2023, the highest since September 2005, from 21.34 percent in the prior month.