More than N237.22 billion worth of failed transactions was recorded at the Nigerian Treasury Bills (T-Bills) auction conducted in May by the Central Bank of Nigeria (CBN) on behalf of the Federal Government.
In light of the prevailing developments in the markets, fixed income investors were willing to jostle for the N290 billion worth of bills the CBN sought to raise in May with N527.32 billion.
Investors’ increased appetite for the less risky government T-bills amid the recent uptick in interest rates and the scarce investment opportunity in the Nigerian market drove the unsuccessful transactions to their highest level since January when N286.54 billion was reported.
The N237.22 billion idle cash recorded in the review month was 14 percent higher than the N207.5 billion in April, 52 percent more than the N155.86 billion in March and 110 percent higher compared to the N112.65 billion in April. It was, however, less by 17 percent when compared to the N286.54 billion recorded in January.
Investment analysts linked the reason for the unsuccessful bids to the fact that investors were asking for relatively high yields but the government and the CBN were not willing to dance to their tune.
“Any bid above the marginal rate is unsuccessful,” Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham, said, adding that, unlike bonds where all successful bids are allotted at the same rate, “T-Bills is based on the individual rate submitted.”
Explaining how rates are determined, Ebo said the seller/issuer (FG) usually look at its current need for funds while being mindful of the rates submitted by the buyers. “The buyer also submits based on their expectations. A lot of permutations from each party.”
While investors bid at a rate as high as 10 percent for the 91-day bill, 12 percent and 13 percent for the 182-day and 364-day bills, respectively, the Central Bank of Nigeria settled at 2.5 percent, 3.5 percent and 9.65 percent, respectively.
Stop rates for the 91-day & 182-day bills remained unchanged. However, the 364-day bill dipped by 10bps to 9.65 percent.
Analysis of the T-bills auction result for May 26, 2021, showed that the CBN raised a total of N290 billion from the 91-day, 184-day and 384-day bills, N226.82 billion more than the initial N63.18 billion the apex bank sought to raise in this week’s auction.
Investors were less interested in the shorter 91-day and 182-day bills as they attracted a lower interest rate but were willing to subscribe to the longer 364-day bill.
While the 364-day with a much higher interest rate was oversubscribed by N142.58 billion, the 182-day was oversubscribed by N1.41billion but the 91-day bill was undersubscribed by N21.05 billion.
The CBN planned to raise N24.17 million for the shorter 91-day bill but investors were willing to subscribe with N4.43billion. The apex bank was eventually able to allot N3.12 billion.
Investors were willing to subscribe with N5.53 billion for the N19.16 billion offered for the 182-day bill. The apex bank eventually raised the initial 4.12 billion, 18.85N billion lower than what it initially offered.
While the CBN offered to raise N19.84 billion through the longer 364-day Treasury bill, investors said they were willing to invest N286.47 billion. The apex bank later raised N143.88billion, N124.04 billion more than its initial offer.
After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free treasury bills climbed to almost two years-high, as compiled from Nigerian Treasury bills primary market auction Results for May 26, 2021.
Though the recent uptick in T-bills rate to more than 18 month-high is good news for fixed income investors whose real return appreciated to -8.47 percent in May from -9.33 percent in March, the expected high inflation rate remains a challenge.
Even though a BusinessDay poll of five market analysts expect the rates on the less risky government Nigerian treasury bills to reach 14 percent this year, the country’s inflation rate, which is expected to maintain an upward trend, means investors are unlikely to get a real positive return this year.
Ebo expects inflation to rise further in the coming months as the downside risk of fuel subsidy removal remained.
“The question is, as annual inflation moves above 18 percent, can one year (364-day) T-bills go as high 18-19 percent?” Yinka Ademuwagun, investment management analyst at ValuAlliance, asked.
With no relief in sight, Nigeria’s rising cost of goods and services puts the country’s local investors investing in government instrument at a disadvantage when compared with their African peers. Inflation accelerated to 18.12 percent in April.
With 9.213 percent T-bill rates in Kenya, fixed-income investors in the country are enjoying a real return of 3.31 percent. March inflation in East Africa’s largest economy stood at 5.9 percent. But, in Nigeria, Africa’s largest economy, the real return on the 364-day T-bill, the instrument with the highest stop rates is still negative at -8.47 percent.
While interest rates in Nigeria have always been high due to the monetary system in vogue since 2009, which sought to use FGN bonds/T-bills and OMO bills as a means of attracting US dollars into the country to stabilise the naira, but the recent OMO policy by the central bank, which prevents domestic investors from participating in the auction, drove rates to its record low levels.
From October 23, 2019, the apex bank banned non-bank locals (individuals and corporates) from participating in OMO auction at both the primary and secondary market. The CBN’s policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.
T-bills are short-term sovereign debt securities maturing in one year or less. They are sold at a discount and redeemed at par.
According to the FMDQ, the bills are by nature, the most liquid money market securities and are backed by the guarantee of the Federal Government of a nation. The Federal Government of Nigeria, through the CBN, issues Nigerian Treasury Bills to provide short-term funding for the government budget deficit. The T-bills are usually issued through a competitive bidding process, quoted and traded on FMDQ’s platform.
While investment analysts said it is difficult to give recommendations on where investors can invest their funds amid scarce high-yielding instruments, they cited dollar-denominated assets like Eurobond and foreign stocks.
Nigerian investors have continually been in search of investment instruments with returns that are high enough to shield them from the country’s high inflation rate and the weak naira.