Nigerian Treasury bill yields across short, medium, and long term tenors have surged in the last three days after the Central Bank of Nigeria (CBN) narrowed its interest rate corridor.
The summary of the treasury bills auction on July 26, 2023 showed that the treasury bills stop rate printed at 12.15 percent from 5.94 percent on the previous day for the long term instrument.
The stop rate for the medium term increased to 8.00 percent from 3.5 percent, and the short-term instrument rose to 6.00 percent the same day from 2.8 percent on July 25,2023.
A stop rate is the rate an investor places to buy or sell a certain security for a specific price, rather than the market price.
The Central Bank of Nigeria, after its two-day Monetary Policy Committee (MPC) in Abuja on Tuesday July 25, 2023 raised its benchmark interest rate known as the Monetary Policy Rate (MPR) by 25 basis points to 18.75 percent from 18.5 percent.
By unanimous agreement of 11 members present at the meeting, the CBN also narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.
Asymmetric corridor is a tool used by Central Banks to increase the flexibility of monetary policy. According to the CBN, an interest rate corridor was introduced with an upper and lower band around the MPR. The upper band represents the Bank’s overnight lending rate (Standing Lending) while the lower band is the overnight deposit rate (Standing Deposit).
The Nigerian treasury bills secondary market closed on a negative note on Thursday with the average yield across the curve increasing by 263 bps to 6.67 percent from 4.04 percent on the previous day, according to a report by FSDH research.
The report noted that average yields across short-term, medium-term, and long-term maturities increased by 169 bps, 217 bps, and 317 bps, respectively. NTB June 6, 2024 maturity bill witnessed maximum selling interest, with a yield increase of 373 bps each.
“I believe CBN is trying to get foreign portfolio investors to bring in FX,” Yemi Kale, partner & chief economist, KPMG Nigeria, said.
He said with internet rates hikes in advanced countries Nigeria’s old treasury bill rates were almost at the same point as these countries so they will have no incentive to take the risks to bring their foreign capital to purchase these treasury bills at the old rate especially when inflation has risen to 23 percent.
“So by increasing the rates the CBN is trying to make treasury bills more attractive to foreign capital inflow, understanding that until the country can attract significant inflows it will not be able to keep the FX rate stable and it will likely keep depreciating,” Kale said.
Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, said investors demanded a higher return on their investment given the high inflation rate in the market and the devaluation of the currency. He said the implication is that Investors will earn a higher return on their investment than before.
Nigeria’s headline inflation rate accelerated by 38bps year-on-year to 22.79 percent in June 2023 compare with a 19bps y/y increase to 22.41 percent over the previous month.