• Tuesday, June 25, 2024
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Treasury bills end year with lower negative real return

Nigeria’s foreign reserves

Fixed-income investors seeking high-yielding securities in the light of the prevailing developments in the markets earned more in real terms from the risk-free government Treasury Bills (T-Bills) in 2021 than they did in 2020, thanks to the 8th consecutive slowdown in the inflation rate.

Though still in the negative, the real return on the short-term instrument, (T-bill interest rate minus inflation), in 2021 stood at – 10.5 percent, better than the -14.54 percent reported in the comparable period of 2020.

After crashing to a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free Treasury bill jumped to more than 17 months-high of 9.75 percent on May 14. The rate, however, plunged to an 11-month low of 4.9 percent at the last auction of 2021, as compiled from Nigerian treasury bills’ primary market auction results for December 29, 2021.

If the interest rate, what government pays investors for borrowing their funds, on the longer 364-day bill had maintained its 9.75 percent reported in May, fixed income investors would have earned a negative real return of 5.65, almost 50 percent higher than the actual inflation-adjusted return that was recorded in the review period.

Investors’ interest in T-bills and consequently, the lower interest rate, has been largely due to their unwillingness to take a risk on longer-term instruments due to expectation of higher interest rates in 2022, according to Ayorinde Akinloye, Associate Investment Research in United Capital.

“As a result, most investors are piling cash in short-term assets like T-Bills until the coast is clear on yield direction,” the Lagos-based analyst said.

Analysis of the T-Bills auction result for 2021 revealed that the real return investors earned from the short-term instrument at the end of 2021 were almost the same as the return they earned at the beginning of the year. While the inflation-adjusted return for the 364-day T-bill stood at -10.5 percent at the end of December, the rate was -10.63 percent in January.

Read also: Commercial paper offers double interest rate on T-bills

The inflation rate was however different in the review period. As of January 2021, Nigeria’s inflation rate stood at 12.13 percent but slowed for eight successive months to 15.40 percent in November after rising at a faster pace for 19 consecutive months to March 2021.

The high inflation rate reported in November 2021 compared to the beginning of the year and the decline in the T-bill rates are the reasons the real return remained in the negative, according to market analysts.
Going into 2022, Akinloye said, “we should see stability and consequent reversal of T-bill rate from 4.9 percent level.”

Further analysis of the T-bill auction result for 2021 showed that while interest rates on the 91-day and 182-day bills were mostly constant at about 2.49 percent and 3.45 percent, respectively in the review year, the longer 364-day reported the most decline, ending the year at 4.9 percent.

Breakdown of the last T-bill auction result for 2021 revealed more than N29.48 billion worth of failed transactions were recorded at the Nigerian Treasury Bills (T-Bills) auction conducted last Wednesday by the Central Bank of Nigeria (CBN) on behalf of the Federal Government of Nigeria (FGN) as investors bid at rates as high as 5.25 percent 6.7 percent and 6.99 percent on the 91-day, 182-day and 364-day bills.

Subsequently, the apex bank lowered rates across the three tenors to 2.49 percent 3.45 percent 4.9 percent respectively.

Investors jostled for the N52.76 billion the CBN raised at the auction with N82.25 billion, almost two times oversubscribed.

Like other auctions in 2021, investors’ appetite for the longer 364-day bill was higher than the 91-day and 182-day bills.

The CBN sold N2.49 billion worth of bills for the 91-day paper, N2.16 billion worth of bills were allotted on the N182-day paper, while bills valued at N48.11 billion were sold on the 364-day paper.

While the 364-day bill with a higher interest rate was oversubscribed by N27.88 billion the shorter 91-day and 282-day bills were oversubscribed by a combined N1.61 billion.

The CBN planned to raise N4.61 billion for the shorter 91-day bill but investors said they were willing to subscribe with N2.71 billion. The apex bank eventually issued N 2.49 billion, N2.12 billion less than the CBN’s initial offer.

Investors were willing to bid with N 3.47 billion for the N2.16 billion raised for the 182-day bill, N1.31 billion more than what the CBN raised. The amount raised by the apex bank, however, was lower than its initial offer of N3.31 billion by N1.15 billion.

While the CBN offered to raise N44.84 billion through the longer 364-day Treasury bill, investors said they were willing to invest more with N 75.99 billion. The apex bank later raised N48.11 billion. The apex bank issued N3.27 billion worth of more bills.