For the first time in over 3 years, inflation premium on treasury bills has declined to negative territory as more than N2trillion of maturing OMO bills trigger excess liquidity and lower yields in the Nigerian money market.
Some analysts predicted that the decision to ban individuals and non-bank institutions from accessing OMO auctions could have significant impact on yields in the treasury market. Just about 2 weeks later, the impact is already being felt as treasury yields have now declined to just 9% from 12% earlier in the week.
Although the yield curve remains normal, some analysts are already expressing concerns of how destabilizing negative real yields could be to the debt market.
“I think yields this low are unsustainable. The CBN is trying to force yields down by pushing investors out of the OMO market and suppressing yields in the treasury market. There is nothing natural about having inflation at 11.2% and treasury yields at 9%. The maths just won’t add up for investment community whom the CBN is expecting to be investing at negative real returns,” said Obinna Uzoma, Chief Economist at EUA Intelligence.
“I think investors will switch to longer dated FGN bonds to get yields above inflation which will then drive short term yields back higher. That’s the normal response I think we will see in the market in the coming weeks. This just isn’t normal!” Uzoma added.
Maju Eldad, Lecturer in Economics at Federal University Kashere, Gombe told BusinessDay that he expects the government to immediately take advantage of the current low yields to issue more debt to fund the budget deficits.
“Lower yields may not be good news for investors, but it certainly is excellent news for borrowers with the Federal Government being the biggest borrower. If the Federal government can raise up to N2 trillion in single digit here in Nigeria to fund its budget, that could cut the debt servicing cost in the country significantly, possibly taking it below N2 trillion. This should give a breather to Nigeria’s public finances where debt servicing cost to revenue is about 70%,” Eldad added.
The ability to raise up to N2 trillion at single digit now seems a possibility in Nigeria for the first time since 2015. Treasury yields rose sharply in 2016 after a stagflation caused inflation to jump to more than 16%, pushing treasury yields above 19% as investors demanded higher inflation premium.
“Today, lower yields are expected to keep investors less hungry for government notes at a time that the government is funding a record deficit. Last year, Nigeria’s actual government budget deficit was over N3 trillion. Next year, we expect it to surpass N5 trillion. If the yield curve doesn’t adequately compensate short term investors, the government will struggle to use its treasury bills to adequately fund its budget. The menace of negative inflation premium far outweighs any benefit the CBN is trying to achieve here,” Uzoma concluded.
IFEANYI JOHN
