The demand for Nigeria’s one-year treasury bills is declining, despite the CBN’s recent efforts to raise yields, indicating liquidity constraints in the market. A surprise auction saw yields rise to 24.90 percent, yet demand fell significantly to N861 billion, the lowest this year. Foreign investor interest is also waning, impacted by market conditions and naira volatility.
The demand for Nigeria’s one-year treasury bills (T-bills) has significantly declined, despite the Central Bank of Nigeria (CBN) attempting to raise yields in recent auctions. Recently, the CBN adjusted its auction calendar to include an unexpected sale, where yields increased from 22.52 percent to 24.90 percent, marking the second consecutive hike amid ongoing liquidity constraints in the market. This adjustment led to a positive real return of 1.72 percent, a first since May 2020.
Nonetheless, demand for these one-year T-bills plummeted to N861 billion during the latest auction, the lowest this year, in stark contrast to N1.5 trillion at the year’s initial auction. This decline was noted despite the offered amount being the most substantial since February 2024, at N800 billion. The peak demand for Nigeria’s T-bills previously reached N3.2 trillion against a supply of merely N670 billion, highlighting a stark decrease in market interest.
The reduction in demand has been attributed primarily to limited system liquidity, according to Tajudeen Ibrahim, head of research at Chapel Hill Denham. He elaborated that domestic demand is greatly influenced by liquidity conditions, while foreign portfolio investors (FPIs) tend to prefer OMO bills. He emphasized the current yield of over 24 percent on one-year bills offers both solid real returns and advantageous carry trades for FPIs amidst stabilized global benchmark interest rates.
Wednesday’s auction aimed to address a shortfall in an initial N800 billion planned for the first quarter’s T-bills issuance addresseing critical market concerns. Matilda Adefalujo, a fixed-income trader, also pointed to low liquidity influencing demand and noted that the CBN’s intention was to highlight the attractiveness of treasury bills due to their robust yields.
In previous months, foreign banks appeared optimistic regarding Nigeria’s T-bills, as J.P. Morgan asserted in their report: “We remain long on Nigeria’s T-bills as reform momentum begins to yield results; however, this trade focuses more on the naira’s positioning.” While the naira began 2024 strongly, holding steady around N1,500, it has faced depreciation pressures, dropping to N1,580 as of the latest auction, which coincided with waning T-bill demand.
Investor caution has surged due to global tariff tensions, prompting a shift towards safer domestic assets. Additionally, analysts noted an increasing trend of FPIs exiting the T-bill market. One analyst from Capitalfield remarked on the exchange rate spikes attributable to mass withdrawals by FPIs, prompting the CBN to increase OMO bill yields to mitigate capital flight risks.
Kingskin Okojie, a treasury analyst at Access Bank, commented on the decline of FPI participation in T-bills that spurred rising yields as the CBN seeks ways to attract these investors back. He noted, “There’s a clear correlation between Treasury bill rate declines and FX market volatility,” suggesting that increased yields might deter FPIs from exiting the market. Despite the CBN’s efforts, the recent auction resulted in the sale of only N436.72 billion worth of one-year T-bills, contributing to a total of N504 billion across all tenors on the day.
In conclusion, Nigeria’s one-year T-bills are experiencing a significant drop in market demand despite rising yields and efforts by the CBN to stimulate investment through surprise auctions. The liquidity constraints in the financial system and the changing sentiments of foreign investors, alongside recent currency volatility, are central to understanding the current landscape for T-bills. The CBN’s strategies to boost participation must effectively address these liquidity challenges to retain investor interest moving forward.
Original Source: businessday.ng
