Demand for Nigeria’s one-year treasury bills is declining due to liquidity constraints, despite the Central Bank’s attempts to raise yields, leading to low participation rates in recent auctions. The market faces challenges with foreign investor interest, currency volatility, and strategic moves by the CBN to counteract these trends.
The demand for Nigeria’s one-year treasury bills (T-bills) has shown a consistent decline despite the Central Bank of Nigeria’s (CBN) recent efforts to increase yields at recent auctions. The CBN unexpectedly adjusted its auction calendar, introducing an additional sale, which led to an increase in one-year T-bill yields from 22.52 percent to 24.90 percent. This represents a consistent upward trend and results in a positive real return of 1.72 percent, the first instance of such since May 2020.
Nevertheless, the appetite for the one-year T-bill significantly dwindled to N861 billion during this auction—the lowest this year—compared to N1.5 trillion at the first auction of 2024. Despite the largest offer since February 2024 of N800 billion, weak demand persists within the market, which previously peaked at N3.2 trillion worth of bids against a limited supply of N670 billion.
Tajudeen Ibrahim, head of research at Chapel Hill Denham, has linked the decrease in demand primarily to limited liquidity within the system. He elaborates that domestic demand is highly influenced by system liquidity and that foreign portfolio investors (FPIs) tend to focus on OMO bills as a better representation of market appetite. He observed that the lucrative carry trade presented by the T-bills could be attractive given the yield surpassing 24 percent amidst stable international bank interest rates.
Matilda Adefalujo, a fixed-income trader, corroborated this view by indicating that the additional auction was created to mitigate several concerns, including the intent to demonstrate that Nigerian Treasury bills remain appealing due to robust yields. She emphasizes a strategic move to advance borrowing initiatives ahead of a possible rate reduction.
Earlier in 2024, foreign banks had exhibited optimism regarding Nigerian T-bills. J.P. Morgan highlighted ongoing reforms as a supportive factor, though they emphasized that the trade is heavily dependent on the stability of the naira. Initially, the naira performed well but faced depreciation pressures, falling from N1,502 to N1,580 due to fluctuations in the foreign exchange market coinciding with diminishing T-bill demand.
Investor caution intensified as global tariff tensions have diverted capital towards safer domestic asset classes. Additionally, some analysts reported observed exits by FPIs from the T-bill market. The analyst from Capitalfield pointed out that the recent spike in exchange rates was largely a consequence of substantial withdrawals by FPIs, prompting the CBN to raise OMO bill yields strategically to stave off capital flight.
Treasury analyst Kingskin Okojie noted reduced FPI participation resulted in escalating yields as the CBN seeks to reacquire foreign capital. He illustrates that treasury bill rates inversely relate to FX market volatility; as yields decrease, FPIs divest to repatriate naira. Conversely, increasing yields may deter exits by making the investment more appealing to FPIs, thus stabilizing currency flows.
In spite of the unexpected nature of the auction, the CBN managed to sell N436.72 billion in one-year T-bills and a total of N504 billion across all tenors. Total T-bill sales thus far in 2024 reached N4.7 trillion, yet there was minimal interest in the 182-day and 91-day T-bills, where yields rose to 20.39 percent and 18.86 percent respectively, indicating a challenging environment for treasury instruments.
In summary, the Nigerian T-bills market is currently facing a liquidity squeeze, leading to a notable decline in demand for one-year treasury bills. Despite increased yields designed to attract investment, limited system liquidity and foreign investor hesitancy stemming from currency volatility are key factors continuing to impact market dynamics. The CBN’s tactical responses, such as introducing additional auctions and raising OMO yields, highlight ongoing strategies to stabilize and boost investor interest in the face of these challenges.
Original Source: businessday.ng
