Why T-Bills rate at 2-month low is positive for Nigeria’s equities market

The recent yield decline in the fixed income Treasury Bills (T-Bills) instrument triggered by excess liquidity in the financial system holds positive implications for the equities market, BusinessDay findings have shown.

After hitting more than 17 months-high at 9.75 percent on May 14, yields on the Federal Government risk-free treasury bills dropped to 8.67 percent on July 14. Analysts expect the rate to decline further on account of the expected increase in demand. Stop rates had plunged to a four-year low of near-zero percent in 2020.

Investors’ search for high-yielding securities in the light of the prevailing developments in the markets is expected to increase demand for some stocks on the Lagos Bourse and consequently boost trade in the equities market, analysts said.

Read Also: Here’s why T-Bill rates are expected to drop further in next 3 months

“The rate moderation may persist at the next PMA auction this month. This is positive for the equities market as investors search for stocks with attractive dividend yield,” Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham, said.

The redirections of funds away from the Treasury bills market to the equities market will be a boost for the Lagos Bourse which reported negative trading for the week ended Friday, July 16.

The market decreased by 0.12 percent while investors lost about N25 Billion. This was caused by mixed trading sessions which saw more losses than gains on the Bourse in the review week.

Some investors continued to cherry-pick attractive counters in the week under review, while others chose to sell down their holdings for profit following previous gains.

The impact of huge demand from investors due to the expectation of downward movement in T-Bill rates was the reason cited by Ayorinde Akinloye, investment research analyst at United Capital, for the two month-low yields reported for the risk-free government instrument.

While investors bid at a rate as high as 10 percent for the 91-day bill, 12 percent and 9.75 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria settled at 2.5 percent, 3.5 percent and 8.67 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.

Analysis of the Treasury bills auction results for the week traded July 14, 2021, revealed that the CBN raised N150 billion from the auction. Investors were, however, willing to invest N574.67 billion, more than three times the amount the apex bank raised at the primary market. The CBN had initially sought to issue N109.52 billion but following the high demand and low-interest rate, it allotted N40.48 billion more.

Breakdown of the auction result revealed that investors were more interested in the longer 364-day bill as compared to their reduced appetite for the shorter 91-day and 182-day bills, one of the reasons why the rate on the 364-day bill plunged further.

While the 364-day bill was oversubscribed by N418.86 billion, the 182-day bill was oversubscribed by N4.36 billion and the 91-day bill was oversubscribed by N1.45 billion.

The CBN planned to raise N12.46 billion for the shorter 91-day bill but investors were willing to subscribe with N6.69 million. The apex bank eventually issued N6.65 billion, N7.22 billion less than the CBN’s initial offer. The N5.24 billion issued by the apex bank through the shorter bill was also N7.22 billion less of the initial amount the CBN sought to raise.

Investors were willing to bid with N11.82 billion for the N25.47 billion offered for the 182-day bill. The apex bank eventually raised N7.46 billion, investors recorded N4.36 billion worth of unsuccessful transactions. The CBN on the other hand raised N 18.01 billion less of what it had initially offered to investors.

While the CBN offered to raise N71.59 billion through the longer 364-day Treasury bill, investors said they were willing to invest N556.16 billion. The apex bank later raised N137.30 billion, N65.71 billion more than its initial offer. Investors reported N418.86 worth of unsuccessful bids.

The declining treasury bill rate means investors have little to cheer about Nigeria’s third consecutive slowdown in the inflation rate.

When May inflation of 17.98 percent was adjusted against the 9.75 percent yield on the 364-day bill, it resulted in -8.23 percent real return. When the same was inputted for June inflation and June T-bill rates, real return declined further to -9.08 percent. Nigeria’s inflation rate dropped further in June 2021 to 17.75 percent from 17.93 percent recorded in the previous month (May 2021).

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 in the last five auctions to July 14, leaves investors with little to cheer.

Nigeria’s high inflation rate coupled with the declining stop rates put the country’s local investors investing in government instruments at a disadvantage when compared with their African peers.

With 9.213 percent T-bill rates in Kenya, fixed-income investors in the East African country recorded a real return of 3.31 percent. March inflation in the region’s largest economy stood at 5.9 percent.

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.

While interest rates have always been high in Nigeria 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 the US dollar to stabilise the Naira, the recent OMO policy by the central bank that prevents domestic investors from participating in the auction has sent yields to its worst record.

From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auctions at both the primary and secondary markets. The CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.

The CBN policy sent yields on the government instrument to their record-low levels, and as a result, investors reported a negative return in real terms amid the country’s rising double-digit inflation rate.

But the increase in OMO bill rates led to the uptick in treasury yield from near zero percent in late 2020 to 9.75 percent. The rate has since reversed on increased demand. Analysts say it is the benchmark rate for determining T-bill rates as OMO is usually higher than rates on the government less risky instrument.

“Contributing to decline in T-Bill rates was the recent maturities of government instruments,” Akinloye said.

The Central Bank of Nigeria recently issued about N722.17 billion worth of treasury bills in the third quarter of 2021, as the same amount had matured between June and July 2021.

The amount the apex bank issued was 26.61 percent higher than N570.39 billion offered in the second quarter (Q2) 2021, and 12.12 percent below the N821.8 billion issued in the corresponding quarter of 2020.

The breakdown of the T-bills programmes the CBN issued in the review period showed that it consists of N41.36 billion for 91-day bill, N151.13 billion and N529.68 billion for the 182-day and 364-day bills, respectively.

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

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