Nigeria’s treasury bills yield has increased to 7 percent from about 3 percent in less than two months after the benchmark interest rate was hiked by 150 basis points (bps) by the Central Bank of Nigeria (CBN), financial market reports have shown.
This was due to rising inflation, which led to an increase in the benchmark interest rate from 11.5 percent to 13 percent on May 24, 2022.
The development is seen as a good opportunity for investors to reduce negative real returns on their investment.
“It is positive for investors because it reduces the impact of high inflation on their investment and enables them to get more returns,” Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest, told BusinessDay on phone.
A month ago, T-bills yielded 4.13 percent on average in the secondary market. At the end of last week, the average yield was 6.81 percent, implying a 268bps jump. Specifically, the 1-year T-bill yield rose by 133bps to 6.39 percent, a report by Coronation Research said.
“We also saw the 1-year yield rising to 6.46 percent at the primary auction, and investors sold off in the secondary market, driving the yield upwards towards its primary market counterpart,” analysts at Coronation said.
However, the major drivers of the overall T-bill yield last week were the shortest end of the curve. Specifically, yields on the 3-month (+602bps) and 6-month (+446bps) T-bills have risen significantly to 9.50 percent and 8.62 percent, respectively. As a result, part of the yield curve is now inverted as 3- and 6-month yields are higher than 1-year yields.
With the rising treasury bills yield, lending to the real sector of the economy may suffer as banks are forced to channel their money into treasury bills, analysts said.
“The increase in treasury bills rate has been long coming, given the rising inflation rate and further to the recent increase in the monetary policy rate by 150 basis points. Investors continue to search unsuccessfully for positive real returns,” said Taiwo Oyedele, head of tax and corporate advisory services at PwC.
This increase in rate, he said, will cushion the erosion of the real value of money market investments, and it is expected to stimulate more savings, albeit at a higher cost to businesses seeking to raise finance by way of debt.
“Unfortunately, the government’s debt service cost will also increase which will reduce the revenue available to finance government’s programmes,” Oyedele said.
Commenting on the development, Uche Uwaleke, professor of Capital Market and president of the Association of Capital Market Academics of Nigeria, said rising government borrowing is primarily responsible for it. The rate has to be high to make them attractive to investors, he said.
Secondly, in view of the rising inflation rate, the CBN may be using it alongside Open Market Operation (OMO) bills to mop up excess liquidity in the system from higher allocation by the Federation Account Allocation Committee (FAAC).
“As was the case in our recent past, high TB rates will not augur well for the economy. The banks will rather pack funds in TBs than lend to the private sector, with its associated risks. So financial intermediation will be adversely affected,” he said.
On his part, Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said the increase in yields was a result of rising inflation, adding that this will compensate investors in the fixed income to enable them to sustain their interest in securities.
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Nigeria’s inflation accelerated to 18.60 percent year-on-year in June from 17.71 percent in May, according to the National Bureau of Statistics.
According to the Coronation report, the reason for the inversion is a sustained squeeze in banking system liquidity.
In recent weeks, outflows from the system such as the Cash Reserve Requirement, Open Market Operations, T-bill, and FGN bond auction debits have outweighed inflows from sources such as FAAC allocations to states and local governments, T-bill and OMO maturities, and FGN bond coupons.
The immediate reaction of the banks last week was to raise their deposit rates; they also sold off short-term liquid instruments such as CBN Special Bills and short-dated T-bills, leading to the rapid increase in yields.
“Historically, this has tended to be a temporary occurrence and this instance is unlikely to be different. As a result, we expect banks’ deposit rates to moderate soon and a correction at the short end of the yield curve once system liquidity returns to a surplus position,” the report said.
“However, it does seem that the CBN is tolerating a gradual rise in 1-year T-bill rates as these have been rising since mid-March when they were just under 4.00 percent. Further along the curve, our core view remains that a rise in the government deficit is likely to lead to an increase in naira-denominated government borrowing this year, with the implication that market interest rates will rise,” the analysts said.
