Despite a 13-month high uptick in the yields on Federal Government risk-free instruments, fixed-income investors are earning negative returns in real terms, thanks to Nigeria’s inflation rate that accelerated to a 48-month high in February.
With an inflation rate of 17.33 percent, the real return for the 7 percent interest rate on the 364-day Federal Government less risky treasury bill is -10.33 percent, as analysed from Nigerian treasury bills primary market auction results for March 17, 2021.
The recent rise in the yield on government instrument is supposed to be cheering news for domestic investors who in the last two years reported a return that was near zero percent. But with the increasing inflation rate in Africa’s largest economy, local investors are earning less than their peers in countries like Ghana and Kenya where the inflation rate is less than 10 percent.
With 13.26-percent T-bill rates in Ghana and 9.213 percent in Kenya, fixed-income investors in both countries are enjoying a real return of 2.96 percent and 3.41 percent, respectively. As of February, inflation in the West African country stood at 10.3 percent and 5.8 percent in the East African largest economy.
Even though a BusinessDay poll of five-market analysts expects the rates on the less risky Nigerian treasury bills to reach 9 percent before the end of June, the country’s inflation rate, which is expected to maintain an upward trend, poses a threat to investors real return.
“We expect the rate to approach 8-9% before this uptrend subsides,” Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said.
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While interest rates in Nigeria have always been high 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 US dollars into the country to stabilise the naira, but October 23, 2019, OMO policy by the central bank, which prevents domestic investors from participating in the auction, drove rates to its record low levels.
From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participation in OMO auction 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.
After touching its lowest record since 2016 in the fourth quarter of last year, rates on T-bills climbed to 13-month high of 7 percent for the 364-day bill. Weeks after the CBN shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest levels seen in almost a year, fixed-income investors demanded higher rates for T-bills.
According to the T-bills auction result for March 17, 2021, investors bid at a rate as high as 8 percent for the 91-day bill, 9 percent and 11 percent for the 182-day and 364-day bills, respectively. But the CBN settled at 2 percent, 3.5 percent and 7 percent, respectively. The stop rates for the 91-day and 182-day bills stayed flat but the 364-day bill increased by 100 basis points compared with the result of the previous auction.
The recent uptick in interest is, however, good news for fixed income investors as their real return on investment, which appreciated to -10.33 percent in March, is much better compared to the -13.89 percent report in November 2020, when investors were more concerned about losing their capital than return on investment.
“This is positive for fund managers as well as Nigerians amid rising inflation rate, as the negative real return has reduced compared to the beginning of the year,” Ebo said.
Analysis of the T-bills auction result for the week traded March 17, 2021, shows that investors are already taking positions on the government’s less risky treasury following the expected rate hike. Many investors have started redirecting some of their funds away from equities.
While the CBN planned to initially raise N47.07 billion at the last auction, investors’ willingness to subscribe with N116.85 billion pushed the apex bank to allot bills worth N61.89 billion.
Fixed-income investors, therefore, posted an unsuccessful bid of N54.96 billion, this was N240.37 billion less than the N295.33 billion worth of unsuccessful bids reported in November 2020, when limited investment opportunity forced investors to choose low risk over high return.
Breakdown of the auction result for March 17, 2021, shows that investors were willing to subscribe to the N2.52 billion the CBN raised for the 91-day bill with N6.73 billion, almost three times more than the CBN’s offer.
The 182-day paper was oversubscribed with an unsuccessful bid worth N4.72 billion. While investors were willing to subscribe to the 364-day instrument with N99.49billion, the CBN only allotted N53.46 billion, leaving investors with unsuccessful transactions worth over N446 billion.
