Investors are expecting lower returns during a Treasury Bills Primary Market Auction (PMA) today even when they would have wished for better returns to compensate for high inflation.
Nigeria will auction N140 billion worth of one-year Treasury bills, N6 billion worth of 182-day bills and N3.17 billion of 92-day bills today.
An investor told BusinessDay that one of the country’s largest investment houses already advised clients to expect lower rates of between 6.70 – 6.90 percent at today’s auction compared to the 7.25 percent yield at the last auction.
The reason for the expectation for lower rates is because of the high liquidity in the system, which leaves too much money chasing few investment instruments.
“There’s so much liquidity in the system that investors will have little or no choice but to settle for lower returns at today’s auction,” said Tajudeen Ibrahim, head of research at investment bank Chapel Hill Denham.
The problem with settling for lower returns is that it further widens the country’s negative real return on investment.
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Another investor told BusinessDay that he had expected that the negative real return would narrow on the back of slowing inflation and was disappointed that may no longer be the case.
Inflation cooled for the sixth straight month in September to 16.63 percent but the pace of deceleration is not happening fast enough for investors who must manage a negative real return on their investment in Treasury bills.
At 7.35 percent, the return on the one-year treasury bill leaves investors with a negative real return of -9.28 percent.
Ghana, for instance, has a real rate of return of around 6 percent.
The Nigerian government is keen to keep interest rates low in order to manage its ballooning debt service cost which was 72 percent of revenues in 2020, according to data from the Debt Management Office (DMO).
While the country will benefit from lower debt service costs, it also runs the risk of losing investors to other markets with real returns on investment.
