|
Getting your Trinity Audio player ready...
|
Nigeria Treasury Bills: Investors Watch for Fresh Yield Signals as CBN Rate Cut Reshapes Stop Rates and 364-Day Bill Returns
The Treasury bill market is entering the second half of October with one question hanging over it: how much lower will returns go now that the Central Bank of Nigeria has reset its benchmark rate? The auction on October 7 gave a first answer. Yields eased again, but demand stayed strong enough for the government to raise almost twice what it did three weeks earlier. For investors who rely on short-term government paper for steady income, the details behind that result matter more than the headline.
At the sale, the CBN offered N900 billion on behalf of the Debt Management Office, up from N500 billion at the previous auction. Bids reached N1.77 trillion, and N968.47 billion was allotted. The one-year bill took most of the attention. It drew N1.68 trillion in bids against N700 billion offered, and N885 billion was allotted on that tenor, more than 91 percent of the total raised. The 91-day and 182-day bills were left behind, attracting N39.42 billion and N46.87 billion against N100 billion offered for each. Investors, in short, want to lock in for a year.
The prices tell the same story. The 364-day bill cleared at a stop rate of 15.85 percent, four basis points lower than the previous sale. The 182-day bill cleared at 15.80 percent and the 91-day bill at 15.50 percent. The one-year rate is down roughly 180 basis points from the levels seen in mid-July, when it stood near 17.7 percent. Anyone who bought a year ago or even in the summer is now being offered noticeably less for the same product.
The gap between a stop rate and what an investor actually earns is a common source of confusion. Treasury bills are sold at a discount to their face value, and the stop rate is the discount rate, not the return. A bill with a face value of N1 million bought at a 15.85 percent discount for 364 days costs about N841,900 and pays N1 million at maturity. That works out to a true yield of about 18.83 percent, according to market analysts. Compared with inflation of 15.39 percent in August, the real return on a one-year bill is positive by around three and a half percentage points. That is a healthy margin, and it helps explain why demand has held up even as yields drift lower.
Why are yields falling in the first place? The Monetary Policy Committee cut the policy rate by 350 basis points to 23 percent on September 22 and narrowed the rate corridor to +50/-300 basis points around it. The rate banks earn on cash left at the central bank overnight dropped to 20 percent, and the rate they pay to borrow from it fell to 23.5 percent. The central bank described the move as a recalibration aimed at bringing the benchmark in line with market rates, not as a conventional easing. In practice, it lowers the floor under short-term yields, and secondary market trading has reflected that. The average Treasury bill yield fell 98 basis points to 17.48 percent on October 6, with the three-month benchmark down 158 basis points to 16.43 percent.
Another pull on returns comes from the central bank’s own bills. At its Open Market Operations auction on October 6, the CBN allotted N3.31 trillion, and the 182-day OMO bill cleared at 16.92 percent. That is about 112 basis points above the 182-day Treasury bill. Market analysts say the premium on offer from OMO paper drew cash away from the government’s auction and helps account for the 58 percent fall in total Treasury bill subscriptions from the N4.23 trillion recorded on September 23. The decline is less worrying than it sounds. The September figure was unusually large, and the October bid-to-cover ratio of about 1.97 times is still comfortable.
Where might the next signals come from? The first is the auction calendar. The CBN had not circulated its fourth-quarter Treasury bill schedule when the October 7 sale was announced, so the size and pace of upcoming offers are unknown. Larger offers would give the government more room to raise money and might push yields up slightly if demand fails to keep pace, while smaller ones tend to push yields down. The second is liquidity in the banking system. About N9.05 trillion in OMO bills is due to mature in October, according to market estimates, which is roughly 68 percent of expected inflows. When that cash returns to banks and investors, some of it will look for a home, and Treasury bills are a likely destination. The third is inflation. The next reading from the National Bureau of Statistics will show whether prices are still easing, and a lower figure would widen real returns while giving the central bank more space to cut further.
The fourth is the Monetary Policy Committee’s next meeting on November 23 and 24. Investors will study any hint about further adjustment to the policy rate and the corridor, because both affect the floor under yields. A fifth factor is the naira. The currency traded near N1,333 to the dollar on October 7, and steady conditions at the foreign exchange market support demand for naira assets among foreign and local buyers.
For individual investors, a few practical points apply. Falling stop rates do not erase returns that remain well above inflation, but they do mean today’s yield may not be available at the next auction, which is why some investors spread purchases across several maturities, a method often called laddering. Those who lock in a one-year bill give up access to their money until maturity, unless they sell in the secondary market at a price that could be lower than expected. Fees charged by the bank or broker also reduce the final return, so it is worth comparing the after-fee yield across providers. Auction results and notices are published by the Debt Management Office, while the Central Bank of Nigeria publishes policy decisions and the weekly market data that move yields. This is general information and not financial advice, and anyone unsure about where to invest should speak to a licensed adviser.
The bigger picture is that the government is borrowing more cheaply than it did a few months ago, savers in regular accounts are earning less, and those with money in Treasury bills are still being paid a positive real return. How long that holds depends on how fast inflation falls and how aggressively the central bank drains cash. For now, investors are watching each auction for the next piece of evidence. More coverage of banking and markets is available on Business Tech.
