Results from this week’s Treasury bill auction held on Wednesday showed that the spread between the 91-day Treasury bill and 364-day Treasury bill rose as high as 350 basis points. Analysts say the yield curve is steepening due to rising inflation expectations, and risk aversion as investors demand higher rates to remain invested in government issued securities through the election season.
Rising treasury yields means higher cost of borrowing for the government to fund the trillion naira plus fiscal deficit.
About N263.4 billion worth of treasury bills were subscribed by investors on Wednesday in the primary market with 364-day Treasury bill alone accounting for N212 billion (80% of total). Investors avoided the lower yield 91-day bill with a stop rate of 10.9 percent, instead opting to purchase the yearlong bill with a stop rate of 14.4 percent. The 184-day bill had a stop rate of 13.49 percent, giving investors a 250-basis point premium above the 91-day bill of 10.9 percent.
The 91 and 184 day treasury bills were both undersubscribed while the 364-day bill was oversubscribed by 240 percent showing investors’ appetite for high yield investment.
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“Investors just wanted to buy the most attractive instrument, which was the one-year tenor. At the OMO Auction held last week, the Central Bank of Nigeria (CBN) hiked the one-year stop rate to 14.5 percent, so the expectation going towards Wednesday’s auction was that, one-year rate will also go up to match up the OMO clearing rate,” Omotola Abimbola, fixed income and currency research specialist at Ecobank Research said.
The 91 day treasury bill are set to mature in January before the general elections while the 184 day treasury bill should mature in April after the election but before democracy day which is typically the handover period. 1 year Treasury bill investors are set to hold all through the election, to handover and formation of government which may explain the 350 basis point spread between the 91 day and 364 day bills.
“About $7.5 billion of Treasury bills are set to mature in the coming months of the year with December being particularly heavy. We expect yields to keep going up because if those funds are paid out on maturity, it could cause big trouble for the country in terms of inflationary pressure and repatriation of profit by foreign investors. We think the election risk may take treasury yields around 20 percent to convince investors to rollover,” said Wale Okunrinboye, head of investment research at Sigma Pension.
Analysts expect that the CBN may be pushing interest rate in money market higher to combat rising inflation in the country after two consecutive months of higher CPI. The Central Bank has also struggled this year with large capital outflows which have depleted the external reserves by around $5 billion since July.
Earlier in the month, Yvonne Mhango, Economist at RenCap told BusinessDay that “CBN needs to take treasury yields to levels they were last year or just devalue the currency or do both.” By raising interest rate, the monetary authority can reverse the capital outflows in the country and protect the external reserves. Now it appears her suggestions may have been heard by the policymakers and the interest rate move is already having an effect on investor’s behaviour.
“Towards the election, investors like to keep a shorter duration in anticipation of further increase in interest rates, so people demanding for one-year ahead of the 3-months and 6-months even goes against that expectation. That probably reflects the fact that the CBN has made the one-year rate very much attractive, the one-year rate has gone up 100 basis points compared to the last one-year auction of 13.5 percent,” Omotola said.
With almost 70 percent of government revenue currently used to service sovereign debt, it won’t be unlikely that Nigeria’s credit rating gets hurt with the binge borrowing in this current high interest rate environment.
“CBN will likely prefer to risk drilling a hole in its balance sheet than watch another round of currency depreciation. If the CBN can blow $2 billion when we are still five months to elections, which tells you what their priority is. It’s this obsession with exchange rate for political reasons that will be our own undoing,” a fixed income trader told BusinessDay.
IFEANYI JOHN
