The recent yield decline in the fixed income Treasury Bills (T-Bills) instrument triggered by investors’ increased appetite for the less risky asset coupled with the policy by the Central Bank of Nigeria (CBN), holds positive implications for the Federal Government and corporates, BusinessDay findings have shown.
As a result of the rate decline to its lowest levels in three months in the first week of August, the Federal Government’s subsequent borrowing is expected to be at a lower cost and is consequently expected to rob off on its debt servicing cost.
Corporates, on the other hand, are also expected to raise commercial papers at a lower cost compared to May 2021 when the T-Bills rate inched close to 10 percent.
According to Yinka Ademuwagun, investment management analyst at ValuAlliance, the downward movement of T-bills started around the time the news of Nigeria spending 72 percent of its revenue on debt servicing was making the rounds.
“It is positive for the federal government because it means they will be borrowing at a lower rate. It is the same for corporates because most of the commercial papers issued by corporates are benchmarked against the T-bill rates,” Ademuwagun said.
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After hitting more than 17 months-high at 9.75 percent on May 14, yields on the Federal Government less risky T-Bills dropped to 7.35 percent on August 11. 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.
“We’ll continue to see that going forward. Rates are expected to continue to drop till at least the end of the year,” Ayorinde Akinloye, investment research analyst at United Capital, said.
According to the Lagos-based analyst, the recent T-Bills rate decline is in line with what the DMO and the CBN are trying to achieve. “They are trying to reduce the cost of borrowing for the federal government because the government‘s debt service cost is very high and they are trying to reduce that burden on the government.”
While investors bid at a rate as high as 10 percent for the 91-day bill, 12 percent and 10 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 11, 2021, revealed that the CBN raised N156.33 billion from the auction. Investors were, however, willing to invest N398.37 billion, almost three times the amount the apex bank raised at the primary market. The CBN had initially sought to issue N51.50 billion but following the high demand and low interest rate, it allotted N104.83 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 N360.12 billion, the 182-day bill was undersubscribed by N10.96 billion and investors were willing to invest in the 91-day bill with N2.29 billion less the apex bank had put up for offer.
The CBN planned to raise N8.44 billion for the shorter 91-day bill but investors were willing to subscribe with N6.15 million. The apex bank eventually issued N4.80 billion, N2.29 less than the CBN’s initial offer. The amount raised through the shorter bill was also N3.64 billion less than the initial amount the CBN sought to raise.
Investors were willing to bid with N5.10 billion for the N16.06 billion offered for the 182-day bill. The apex bank eventually raised N3.75 billion. The CBN raised N 12.31 billion less of what it had initially offered to investors.
While the CBN offered to raise N27 billion through the longer 364-day Treasury bill, investors said they were willing to invest N387.12 billion. The apex bank later raised N147.78 billion, N120.78 billion more than its initial offer. Investors reported N360.12 worth of unsuccessful bids.
The declining Treasury bill rate means investors have little to cheer about Nigeria’s fourth 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 -10.40 percent. Nigeria’s inflation rate dropped further in June 2021 to 17.75 percent the previous month.
While the slowdown inflation rate 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 six auctions to August 11, 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 the T-bills rate revert downward, Ademuwagun said.
According to the analyst, “For investors that have a closed-ended fund, they have taken advantage of the high interest of May when the rate was approaching 10 percent. Now that rates are dropping it is positive for such funds because it means prices are appreciating.”
But, for the open-ended fund, that continues to receive new investment, he said “it is negative because it means they will be getting a lower return on their investment.”
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 in May. The rate has since reversed on increased demand. Analysts say the OMO rate is the benchmark rate for determining T-bill rates because it is usually higher than rates on the less risky government instrument.
