For the first time in two years, Nigeria’s inflation rate slowed for the second successive month in May. The slowdown however does not provide much relief to fixed income-investors reeling from a negative real return.
While the slowdown is good news for investors as it tends to increase real return on investment, the decline in Treasury Bills (T-bills) rates, which has dropped marginally in the last three auctions to June 16, leaves investors with little to cheer.
After hitting more than 17 months high at 9.75 percent on May 14, yields on the Federal Government risk-free T-bills dropped marginally to 9.4 percent on June 16, as compiled from Nigerian Treasury bills primary market auction results.
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“The inflation rate and T-bills rate are counterbalancing each other. Inflation is slowing down and we are also starting to see T-bills rate revert downward,” Yinka Ademuwagun, investment management analyst at ValuAlliance, says.
Despite the slowdown in the inflation rate, the negative real return (inflation-adjusted return) deepened further from -8.37 percent when inflation stood at 18.12 percent to -8.53 percent when inflation eased to 17.93 percent.
The recent slowdown in treasury bills rate on account of increased demand for the risk-free government instrument is responsible for the fewer benefit investors will be enjoying from the ease in the inflation rate.
While investors bid at a rate as high as 10 percent for the 91-day bill, 12 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 9.4 percent, respectively.
Stop rates for the 91-day and 182-day bills have remained unchanged for most of this year, but the 364-day bill has been declining since the third week of May.
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According to Ayorinde Akinloye, investment research analyst at United Capital, 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 says.
Analysis of the T-bills auction result for the week to June 16 shows that investors chased after the bills the CBN sought to raise with more money than the apex bank was willing to issue.
The CBN raised N30.58 billion from the last T-bills auction but investors were willing to invest N251.56 billion, eight times more than the amount the apex bank raised at the primary market. The CBN had initially planned to issue N14.83 billion but following the high demand, it allotted N15.75 billion more.
Breakdown of the auction result reveals 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 bill with a much higher interest rate was oversubscribed by N236.86 billion, the 182-day bill was oversubscribed by N940 million and the 92-day bill was oversubscribed by N12.76 billion.
The CBN planned to raise N2.52 billion for the shorter 91-day bill but investors were willing to subscribe with N14.37 million. The apex bank eventually issued N1.61 billion, N12.76 billion more than the CBN’s initial offer. The N1.61 billion issued by the apex bank through the shorter bill was also N910 million less of the initial amount the CBN sought to raise
Investors were willing to bid with N2.64 billion for the N1.7 billion offered for the 182-day bill. The apex bank, however, raised N1.1 billion, and as a result, investors recorded N940 million worth of unsuccessful transactions. The CBN on the other hand raised N60 million less of what it had initially offered to investors.
While the CBN offered to raise N10.61 billion through the longer 364-day Treasury bill, investors said they were willing to invest N264.73 billion. The apex bank later raised N27.87 billion, N17.26 billion more than its initial offer. Investors reported N236.86 worth of unsuccessful bids.
Nigeria’s high inflation rate, which is expected by analysts to accelerate some more and the declining Treasury bills rates that is projected to slow further, put local investors in Africa’s largest economy at a disadvantage when compared with their African peers.
With a 13.26 percent T-bill rate in Ghana, fixed-income investors in the Gold Coast country are enjoying a real return of 5.76 percent. May inflation in the West African country stood at 7.5 percent.
Despite reporting a return (9.4%) on the 364-day bill that was higher than Kenyan’s 9.213 percent, the real return from East Africa’s largest economy at 3.34 percent surpassed Nigeria’s -8.53 percent.
Nigeria’s inflation rate slowed to 17.93 percent in May from 18.12 percent in April.
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 on account of the maturing treasury bills in August.
Stop rates had plunged to a four-year low of near-zero percent in 2020, but the increase in OMO bill rates led to the uptick in the yields.
“Rate is expected to remain low,” Ayodeji Ebo, head, Retail Investment, Chapel Hill Denham, states.
According to Ebo, this is because, “We are expecting huge maturity next month, hence will increase buying interest.”
The 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.
“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,” Akinloye says.
