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Nigeria Treasury Bill Demand Falls 58% as Investors Shift to Higher-Yielding OMO Bills After CBN Rate Cut
Investors pulled back sharply from Nigerian Treasury bills at the October 7 primary market auction, choosing instead to put their money into the Central Bank of Nigeria’s Open Market Operations (OMO) bills, which pay noticeably more. A post-auction analysis by the Financial Market Dealers Association (FMDA), based on central bank data, shows total subscriptions fell 58 percent to N1.77 trillion from N4.23 trillion at the previous sale on September 23. The bid-to-cover ratio, a measure of how many times the offer was covered by bids, dropped to 1.97 times from 8.46 times.
The scale of the fall looks alarming at first, but the auction itself went well for the government. The CBN offered N900 billion on behalf of the Federal Government, up from N500 billion at the last sale, and the Debt Management Office allotted N968.47 billion. That is about 8 percent above the amount offered and nearly double the N497.59 billion raised in September. In other words, the government borrowed almost twice as much as it did three weeks earlier, and it did so without having to pay more. Demand was weaker than the September peak, yet it still covered the offer almost twice.
The reason for the shift is a gap in what each instrument pays. At the OMO auction on October 6, the CBN offered N2 trillion across the 147-day and 182-day tenors and received bids of N3.51 trillion. It allotted N3.31 trillion, about 65 percent more than the offer. The 182-day OMO bill cleared at 16.92 percent, while the 182-day Treasury bill cleared at 15.80 percent. That is a premium of 112 basis points for holding the central bank’s paper instead of the government’s, over the same time frame. For institutions with large cash balances and a short list of safe places to put them, a difference of more than one percentage point is hard to ignore.
The OMO results confirm where the money went. The 182-day OMO bill drew N2.69 trillion in bids, or 2.69 times the N1 trillion offered, and the central bank filled almost all of them. The 147-day bill was a different story, with bids of N817.95 billion against N1 trillion on offer. Stop rates barely changed, easing by two basis points each to 17.22 percent for the 147-day bill and 16.92 percent for the 182-day bill. The pattern suggests investors are comfortable locking in current yields for about six months, rather than taking the shorter bill for a few extra basis points.
The Treasury bill auction was lopsided in a similar way. The 364-day bill dominated, attracting N1.68 trillion in bids against the N700 billion offered, a cover of 2.40 times. The DMO allotted N885 billion on that tenor, more than 91 percent of everything it sold and about 26 percent above the target. Short-dated bills were left behind. The 91-day bill drew N39.42 billion against N100 billion offered, and the 182-day bill drew N46.87 billion against the same N100 billion, so both were undersubscribed. Stop rates held at 15.50 percent for the 91-day bill and 15.80 percent for the 182-day bill, while the 364-day rate slipped four basis points to 15.85 percent.
That last number is worth a closer look, because Treasury bill rates are quoted as discount rates and understate what an investor actually earns. The FMDA estimates that a 15.85 percent stop rate on the one-year bill equals a true yield of 18.83 percent. That sits about 43 basis points above the 12-month benchmark yield of 18.40 percent, reversing the gap seen at the previous auction. The one-year stop rate has now fallen 181 basis points since mid-July, from 17.66 percent on July 15. The government’s short-term borrowing cost is therefore dropping steadily, which is the outcome many analysts expected once the Monetary Policy Committee cut the policy rate by 350 basis points to 23 percent on September 22.
The secondary market is moving the same way. The average Treasury bill yield fell by 98 basis points to 17.48 percent on October 6, from 18.46 percent on September 23. The three-month benchmark yield saw the largest drop, down 158 basis points to 16.43 percent. The one-month, six-month, nine-month and 12-month benchmarks fell by 85, 74, 83 and 90 basis points respectively. Prices in the resale market are adjusting to the new rate level faster than the primary auctions are, which is typical after a major policy change.
Liquidity conditions are part of the picture. Before the Treasury bill auction, system liquidity moderated to N3.96 trillion from N4.86 trillion at the end of the previous week, as the central bank’s OMO sales outweighed cash returning from maturing bills. A tighter system gives banks less spare money to commit to a new auction, and the OMO sale had already absorbed a large share of it a day earlier. That sequencing may explain some of the weaker bidding, since the same pool of cash cannot be used twice.
What should readers take from this? For banks and other institutional investors, the central bank has set the price for parking cash, and it is higher than what the government pays. For the Federal Government, the picture is mixed. Cheaper borrowing is welcome, and the DMO has shown it can raise much more at lower rates. But if OMO bills keep pulling money away from Treasury bills, the government may find the shorter tenors harder to fill, which would leave it relying on the one-year bill for most of its funding. That concentrates its refinancing needs in a single maturity.
For individual savers, the main point is that yields on government paper are still well above inflation, which stood at 15.39 percent in August, but they are gradually coming down. Anyone who buys one-year bills through a bank or broker is accepting a lower stop rate than three months ago, in exchange for a true yield still near 19 percent.
The next steps depend on three things, according to the FMDA: how much cash is in the banking system, how aggressively the CBN issues OMO bills, and what the central bank signals at its next policy meeting. About N9.05 trillion in OMO bills is expected to mature in October, so liquidity could rebuild quickly unless the CBN keeps selling at a similar pace. The Monetary Policy Committee meets again on November 23 and 24. Until then, each weekly OMO result and each fortnightly Treasury bill sale will show whether the premium on central bank paper is holding and whether investors keep preferring it. Readers who follow banking and markets can find more coverage on Business Tech.
