Despite rising yields, demand for one-year Treasury bills (T-bills) in Nigeria has been dropping. Yields rose for the second straight time at an unplanned auction hosted by the Central Bank of Nigeria (CBN), rising from 22.52% to 24.90%. The real return has increased by 1.72% as a result of this yield increase, the first since May 2020. Nevertheless, even though the offer size was the highest since February, demand fell sharply to ₦861 billion from ₦ 1.5 trillion at the year’s first auction.
Analysts blame the banking system’s lack of liquidity for this drop. While liquidity levels drive domestic demand, foreign portfolio Investors (FPIs) typically purchase OMO bills, according to experts like Tajudeen Ibrahim and Matilda Adefalujo. The CBN held an impromptu auction to show that T-bills are still appealing and to make up a ₦800 billion shortfall in its first-quarter issuance schedule. The perception of Nigeria’s T-bills among foreign investors has been conflicting. J.P. Morgan first advised holding long T-bills, but the depreciation of the Naira has caused investor interest to decline.
Only ₦436.72 billion worth of one-year T-bills were sold by the CBN.
As demand for T-bills declines, the currency, which began the year strong at ₦1,500, has subsequently declined to ₦1,580. FX Volatility has also been exacerbated by FPIs pulling out of the T-bill market. In response, the CBN increased the yields on OMO bills in an effort to deter capital flight. Only ₦ l436.72 billion worth of one-year T-bills were sold by the CBN despite the unexpected auction; sales for all tenors totalled ₦504 billion. Limited interest was also seen in the 91-day and 182-day bills, which sold for ₦27.19 billion and ₦40 billion, respectively. These shorter-term bills’ yields rose to 18.86% and 20.39%, respectively.
Investor demand has been declining even though The Central Bank of Nigeria (CBN) has been working to raise yields on one-year Treasury notes (T-bills). This tendency is a result of several interconnected variables. Investors’ capacity to take part in T-bill auctions has been directly impacted by the liquidity problems that the Nigerian financial system has been facing. For example, the lack of liquidity undermined demand for T-bills, causing the average yield to increase by 115 basis points to 24.3% in October 2024. The predicament was made worse by the fact that system liquidity went negative in December 2024, opening ₦1.265 trillion short.
Ongoing inflation makes T-bills less appealing.
Notwithstanding greater returns, demand for T-bills is decreased by these liquidity restrictions, which restrict the amount of money that can be invested in them. In July 2023, Nigeria’s Inflation rate, which has been consistently high, hit 24.08%. Investors face negative real returns when T-bill yields do not increase in line with inflation. In August 2022, for instance, the Interest Rate on Nigeria’s 364-day T-bills was 6%, and the country’s inflation rate was 18.6%. This resulted in a negative yield of 12.6%. Even though yields have recently increased, the ongoing inflation makes T-bills less appealing because, even after accounting for inflation, returns may still be negative.
More so, investors frequently evaluate yields in various markets in order to maximise rewards in relation to risk. Nigerian 91-day T-bills yielded 16.24% in April 2024, while those issued by Egypt and Ghana yielded 27.208% and 24.18%, respectively. Because the government may need to provide more alluring terms to attract investors, a decline in demand for T-bills could result in increased borrowing costs. Public finances may be strained as a result, and either greater taxes or less spending may be necessary. Furthermore, using monetary financing to make up deficits could make Inflationary Pressures worse.
T-bill demand outlook is influenced by a number of variables.
To combat inflation, the CBN may respond by enacting stricter monetary policies, such raising benchmark interest rates, which could further impede economic expansion. Nigeria’s T-bill demand outlook is influenced by a number of variables, such as inflation patterns, domestic liquidity situations, and worldwide economic events. Investor confidence may rise and T-bill demand may rise if the CBN can put policies in place to promote liquidity and manage inflation. However, demand can keep declining if inflation stays high and liquidity issues continue. Investor interest in Nigerian T-bills may also be impacted by global economic uncertainty, such as Trade disputes and changes in foreign Investment flows.