Nigeria’s March inflation widens negative real return on investment

Fixed-income investors seeking high-yielding securities in the light of the prevailing developments in the markets were not disappointed in the last auction on Wednesday, as rates on the 364-day Federal Government short-term Treasury bills (T-bills) rose to 9 percent from 1.5 percent at the beginning of the year.

But with Nigeria’s 18.17 percent inflation rate in March, the highest in four years, the real return on the Federal Government less risky short-term debt instrument depreciated further when compared with March 2020, when the inflation rate stood at 12.26 percent.

While inflation-adjusted return on the shorter 91-day and 182-day bills were -9.77 percent and -8.48 percent, respectively, in April last year, the real return on the bills dropped further to -16.17 percent and -14.67 percent in the comparable month of 2021, thanks to Nigeria record-high 18.17 percent inflation rate.

The trend was the same for the longer 364-day bill. From a -6.96 percent real return on investment last year, the bill gave investors -9.17 percent in the same period of this year.

As the interest rate is trying to play catch up, inflation is moving upward too, Yinka Ademuwagun, research analyst, FMCGs, United Capital plc, said.

“The real return is still clearly negative because inflation is rising faster. If inflation was still at, say, the 11 percent that reported before the border closure last year, then we would have been fine,” Ademuwagun said.

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However, the recent uptick in the yields on the short-term government instrument is helping to comfort investors against the rate at which the high inflation rate is impacting their returns.

“While the rising inflation has broadened negative real return, it is comforting to know that yield on fixed income instruments is also on the rise, which will bridge this gap,” Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said.

After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free treasury bills climbed to more than 16 month-high, as compiled from Nigerian Treasury bills primary market auction Results for April 14, 2021.

While investors bid at a rate as high as 8 percent for the 91-day bill, 9 percent and 13 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria (CBN) settled at 2 percent, 3.5 percent and 9 percent, respectively. The stop rates for the 91-day and 182-day bills remained sticky for the fourth consecutive auction, but the 364-day bill increased by 100 basis points compared to the 8 percent reported in the previous auction.

Market analysts link the increase in the stop rates to the hike in CBN’s Open Market Operation (OMO) rates some weeks ago. Investors are bidding at higher rates and the Debt Management Office (DMO) also needs to raise the cut-off rate to fill some of the orders, an analyst noted.

Weeks after the 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.

Analysis of the T-bills auction result for April 14, 2021, shows that the CBN raised a total of N153.38 billion from the 91-day, 184-day and 384-day bills, N83.82 billion more than the initial N69.56 billion the apex bank offered to raise in this week’s auction.

Investors were less interested in the shorter 91-day and 182-day bills as they attracted a lower interest rate but were willing to subscribe to the longer 364-day bill, which rose by 100bps to 9 percent interest rate.

While the 364-day with a much higher interest rate was oversubscribed by N168.45 billion, the shorter 182-day was oversubscribed by N9.44 billion but the 92-day bill was undersubscribed by N50 million.

The CBN planned to raise N15.92 billion for the shorter 91-day bill, investors were willing to subscribe with N15.87 million. The apex bank was eventually able to allot N12.46 billion, N3.46 billion more than its initial offer.

Investors were willing to bid with N13.94 billion for the CBN N4.50 billion offered for the 182-day bill. The apex bank was able to raise N8.80 billion, N4.3 billion more than its initial offer.

While the CBN offered to raise N49.14 billion through the longer 364-day Treasury bill, investors said they were willing to invest N217.59 billion. The apex bank later raised N132.12 billion, N83 billion more than its initial offer.

Though the recent uptick in T-bills rate to more than one year-high is good news for fixed income investors whose real return appreciated to -9.17 percent in April from -9.33 percent in March, the expected high inflation rate remains a challenge.

Even though a BusinessDay poll of five market analysts expect the rates on the less risky government Nigerian treasury bills to reach 14 percent this year, the country’s inflation rate, which is expected to maintain an upward trend, means investors are unlikely to get a real positive return this year.

Ebo said he expects inflation to rise further in the coming months as the downside risk of fuel subsidy removal remained

“The question is, as annual inflation moves above 18 percent, can one year (364-day) T-bills go as high 18-19 percent?” Ademuwagun asked.

Nigeria’s rising cost of goods and services, which does not have relief in sight, puts the country’s local investors investing in government instrument at a disadvantage when compared with their African peers.

With 13.26 percent T-bill rates in Ghana and 9.213 percent in Kenya, fixed-income investors in both countries are enjoying a real return of 2.96 percent and 3.31 percent, respectively. March inflation in the West African country and East Africa’s largest economy stood at 10.3 percent and 5.9 percent, respectively.

While interest rates in Nigeria have always been high 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 US dollars into the country to stabilise the naira, but October 23, 2019, OMO policy by the central bank, which prevents domestic investors from participating in the auction, drove rates to its record low levels.

From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auction 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.

T-bills are short-term sovereign debt securities maturing in one year or less. They are sold at a discount and redeemed at par.

According to the FMDQ, the bills are by nature, the most liquid money market securities and are backed by the guarantee of the Federal Government of a nation.

The Federal Government of Nigeria, through the CBN, issues Nigerian Treasury Bills to provide short-term funding for government budget deficit. The T-bills are usually issued through a competitive bidding process, quoted and traded on FMDQ’s platform.