The interest rates on Nigerian Treasury Bills have collapsed to within single digits for the first time since 2016 and that may be only the beginning of a lengthy slide.
At a primary market auction Wednesday, 91-day and 182-day bills fell to 7.8 percent and 9 percent, respectively, the lowest rate since June 15, 2016, while the rate on the 364-day bill crashed to 10 percent, the lowest since 2015.
Buying interest from the pension funds and insurance companies and other non-bank investors fuelled the rate crash, as they are now banned by the Central Bank of Nigeria, under Governor Godwin Emefiele, from purchasing short-dated bills issued by the apex bank, otherwise known as OMO bills.
Traders tell BusinessDay they are now rotating into government debt.
“The CBN’s OMO ban for non-bank institutions has rendered some N2 trillion idle with almost nowhere to go for now but into Treasury-bills, and that’s why rates are crashing,” a money manager who did not want to be named said.
“Yields could fall to as low as 5 percent before the market adjusts to the OMO ban,” the person said.
A lower yield environment is positive for government’s ballooning debt service costs and presents a good opportunity for corporates to raise debt at cheaper rates.
However, it creates a conundrum for fund managers, particularly pension funds, who may now be stuck with negative real returns on any new additions to their T-bill holdings of N2.26 trillion.
Real return is deemed negative when it is below the rate of inflation.
As of September, headline inflation printed at 11.24 percent, which means T-bills now offer lower rates than inflation.
There are expectations that inflation could trend higher in the coming months as the impact of the border closure and some fiscal adjustments materialise.
“That will surely present a test for the fund managers and the CBN,” said Wale Okunrinboye, head of research at Lagos-based fund manager, Sigma Pensions.
“If there’s too much money chasing such low returns, it could create a problem for the naira,” Okunrinboye said. “Corporates are well positioned to take advantage of the depressed return in the market to raise debt capital at a cheaper rate.”
The CBN last month issued a directive restricting non-bank financial institutions from purchasing OMO bills, a liquidity management tool of the apex bank.
The move has just about frozen the OMO bills market, with the CBN saying last week that it would now play a market-maker role to curtail the illiquidity in the market.
The collapse in interest rates, while forced by the CBN, has positive implications for the economy, according to Phillip Anegbe, head of research at CardinalStone Partners.
“The restriction of local corporates and individuals from participation in OMO is positive for borrowing costs (for corporates and the FGN) as yields are likely to moderate in the near term,” Anegbe said.
The clear delineation of OMO from other money market instruments also allows the CBN to attract Foreign Portfolio Investors with higher rates at a lower cost as the OMO sales are likely to reduce with the restriction placed on domestic non-bank investors.
The restriction of key corporates, such as PFAs and Insurance companies, from participation in OMO is also likely to free up excess investable cash for allocation to assets beyond fixed income alternatives.
“We see legroom for some flows into fundamentally strong equity names as treasury yields moderate,” Anegbe said.
That view is buttressed by the high earnings and dividend yields in the equity market space.
Tier-1 banks are averaging dividend yields of 10.9 percent, while the yield on the one-year T-bills is now below this level.
High dividend yields are likely to attract institutional investors such as PFAs, as the potential for capital gains in fundamentally sound stocks further enhances the appeal of the equity market.
LOLADE AKINMURELE & OLUWASEGUN OLAKOYENIKAN
