Inflation: T-bills 8% return fails to shield investors

Fixed-income investors seeking high-yielding securities were not disappointed in the first quarter of 2021 as the rates on the T-bills 364-day Federal Government short-term debt instruments rose to 8 percent from 1.5 percent at the beginning of the quarter.

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But with Nigeria’ s 17.33 inflation rate in February, the real return on the 364-day government less risky treasury bill is -9.33 percent.

After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free treasury bills climbed to more than 15- month high in the three months ended March 2021.

Weeks after the Central Bank of Nigeria (CBN) shocked the market with a 10.10 percent stop rate for the 362-day Open Market Operation (OMO) bill, the highest levels seen in almost a year, fixed-income investors demanded higher rates for T-bills.

“The increase in the stop rates can be linked to the hike in CBN OMO rates some weeks ago. Investors are bidding at higher rates and the Debt Management Office (DMO) also needs to raise the cut off rate to fill some of the orders,” Ayodeji Ebo, head, retail investment, Chapel Hill Denham, said.

According to the T-bills auction result for March 31, 2021, investors bid at a rate as high as 8 percent for the 91-day bill, 9 percent and 11 percent for the 182-day and 364-day bills, respectively, but CBN settled at 2 percent, 3.5 percent and 8 percent, respectively. The stop rates for the 91-day and 182-day bills stayed flat but the 364-day bill increased by 100 basis points compared to the result of the previous auction.

Investors showed less interest 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 which rose by 100bps to 8 percent interest rate.

While CBN planned to raise N10 billion for the shorter 91-day bill, investors subscribed with N570 million less. The apex bank was eventually able to allot N2.88 billion, almost four times less than its initial offer.

Investors’ bid for the 182-day bill was the same. While the CBN offered N17.6 billion worth of treasury bills, investors said they were willing to invest N12.74 billion. The apex bank raised N3.24 billion.

The 364-day bill was, however, oversubscribed by N51.72 billion. The CBN initially offered N68.08 billion but after investors said they were willing to invest N190.43 billion, the apex bank increased its allotment to N138.71 billion.

The recent uptick in T-bills rate to more than one year-high is good news for fixed income investors as their real return on investment which appreciated to -9.33 percent in March is much better than the -13.89 percent report in November 2020 when investors were more concerned about losing their capital than return on investment.

Even though a BusinessDay poll of five market analysts expect the rates on the less risky government Nigerian treasury bills to reach 9 percent before the end of June this year, the country’s inflation rate which is expected to maintain an upward trend possess a threat to investors real return.

Despite a 15-month high uptick in the yields on Federal Government risk-free instruments, fixed-income investors are earning negative returns in real terms due to inflation rate which accelerated to a 48-month high in February 2021.

Nigeria’s rising cost of goods and services with no relief insight puts local investors in government instrument at a disadvantage when compared to their African peers.

With 13.26 percent T-bill rates in Ghana and 9.213 percent in Kenya, fixed-income investors in both countries are enjoying a real return of 2.96 percent and 3.41 percent, respectively. February inflation in the West African country and East Africa’s largest economy stood at 10.3 percent and 5.8 percent, respectively.

Interest rates in Nigeria have always been high due to the monetary system 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 October 23, 2019, 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.

Treasury bills are short-term sovereign debt securities maturing in one year or less. They are sold at a discount and redeemed at par.


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