After 18 consecutive months of decline in inflation, which brought about lower treasury yields in the Nigerian market, market experts now fear that the sudden uptick in inflation in the last three months may cause treasury yields to reverse its downwards trend, further escalating the cost of federal government borrowing.
Recall in January 2017, at the peak of the inflation crisis, treasury yields rose as high as 18 per cent. However, since then, inflation has decreased by almost 7 percentage points sending treasury yields crashing to as low as 12.0 per cent in the most recent treasury yield auction held last week.
Treasuries have to compete with inflation, which measures the pace of rising prices in the country. Although T-Bills is a risk-free debt security, it is only interesting to investors if the return on T-bills exceeds the inflation rate. Typically, rising inflation will lead to a higher rate of treasury yields in order to protect the inflation premium on the Bills.
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Obinna Uzuoma, a Lagos based economist told BusinessDay that “Investors are reading the inflation report and wondering if Treasury yields need to rise to compensate for the marginal increase in inflation.”
“Although it is unlikely that treasury yields will suddenly to the levels of 16 per cent that we saw before the elections, it is hard to argue that there is no case for a marginal increase in treasury yields to compensate for the increase in inflation.”
The movement in inflation in the last three months has not been surprising to all economists as the International Monetary Fund had earlier in the year forecasted that Nigeria’s inflation in 2019 may likely hit 14.7 per cent. If IMF’s forecast turns out to be correct, then the likelihood of treasury yields moving beyond 16 per cent is very high.
The last time Nigeria’s inflation rate was 14 per cent was 15 months ago. The CBN has worked earnestly to reduce inflation to the single digits, however, they have failed to achieve this objective since 2015 as food inflation continues to be stubbornly high whereas core inflation is now below 10 per cent.
Uzuoma concluded that “the direction of treasury bills today is heavily dependent on inflationary pressures in the economy with the monetary policy rate wielding very low influence on treasury yields.”
Ifeanyi John
