One of the major concerns of investors before considering any form of investment is getting a relatively high return and whether or not the invested money is secure. These are two worries that the treasury bills (T-Bills) segment of the Nigeria’s fixed income market could clear, particularly with CBN’s recent regulation.
The Central Bank of Nigeria (CBN) last week said it has barred local corporates and individuals from participating in both primary and secondary activities of OMO market, as it makes extra efforts to boost credit flow to the real sector of the Nigerian economy.
OMO is a liquidity management tool used by the CBN to control the volume of money in circulation. Basically, a central bank injects or withdraws liquidity in its currency through the banks by buying or selling government bonds.
The implication of the directive is that individual investors and corporate organisations operating in the country – inclusive of non-bank financial institutions – would no longer have access to the OMO market, leaving the bond and the treasury bills markets as one of the almost no-risk investment options in Nigeria’s financial market.
Read also: Nigeria’s fixed income market freezes up on CBN OMO ban
Both bonds and T-Bills are fixed income instruments which guarantee returns for investors. The latter is a short-term security issued by the CBN on behalf of the federal government with less than one year maturity, while the former is long-term debt instrument issued by government, corporates or other entities with more than one year maturity period.
The CBN’s directive would lead to greater demand in T-Bills and lead to lower cost of borrowing for the federal government, according to Oluwatosin Ayanfalu, an analyst at Lagos-based Zedcrest Capital.
We chose T-Bills over bonds because of this reason coupled with the fact that OMO bills are also short-term instruments and work almost the same way as T-Bills,
Increased demand on T-Bills means lower yields on quoted papers in the secondary market. With this in mind, a list of high-yielding T-Bills quoted on the FMDQ Securities Exchange could guide investors on which of the financial instruments they can use to lock their funds.
Meanwhile, it is noteworthy that the data used in this article were obtained from FDMQ daily quotation list for Friday, October 25, and as such may not represent current trading data. Also, yields on the quoted instruments are annualised. As a result, we used discount yield which measures the real rate of return to an investor.
Discount yield is calculated by dividing the discount (face value – market price) on the paper by its face value (worth of the paper). The result is then multiplied by the ratio of 360 to the days-to-maturity of the paper.
The 342-day paper (01-Oct-2020) currently has the longest duration in the Nigerian treasury bills market. Yield on the paper stood at 14.85 percent on Friday, this implies if you invested N100 last Friday, you would get a return of N14.85 after one year. But since the instrument is quoted in the secondary market with maturity less than a year, it simply means the real return would drop to 12.82 percent.
Similarly, the 335-day paper which is expected to mature on 24-Sep-2020 has a yield of 14.40 percent, translating to 12.51 percent return on investment, while the 328-day paper which maturity date of 17-Sep-2020 would probably return 12.42 percent to investors.
Yield on the 321-day paper which would mature on 10-Sep-2020 closed at 14.25 percent yield level on Friday. But investors could expect a return on 12.45 percent on the instrument if they locked in their funds at Friday’s closing price. But the benchmark T-Bills paper with 314 days before maturity (3-Sep-2020) offers a higher yield of 14.61 percent and 12.76 percent return on investment.
Furthermore, while the yield on the 307-day paper was 13.88 percent and the 300-day paper closed at 13.83 percent yield level, both papers would return 12.22 percent to an investor.
Other T-Bills with relatively high rate of return include; benchmark 293-day bills which has a yield of 14.41 percent as at the close of Friday’s trading session. This implies the paper would return 12.70 percent of invested funds.
The 279-day T-Bills expected to due on 30-Jul-2020 has a yield of 12.80 percent, indicating it would return 11.47 percent on investment, while another benchmark bond yielding 14.18 percent for a year investment would only return 12.71 percent for the remaining 251 days to maturity.
