Thursday
August, 18

Rising Government Bills Open Opportunities For Investors

Financial market statistics reveal that less than two months after the Central Bank of Nigeria (CBN) raised the benchmark interest rate by 150 basis points (bps), the yield on Nigeria’s government bills surged to 7 percent from roughly 3 percent.

The benchmark interest rate was raised from 11.5 percent to 13 percent on May 24, 2022, as a result of growing inflation.

Investors are considered as having a good opportunity to lower their negative real returns on investment as a result of the development.

Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest, told BusinessDay over the phone that the move is advantageous for investors since it lessens the negative effects of rising inflation on their investments and allows them to earn higher returns.

T-bill yields on the secondary market averaged 4.13 percent a month ago. The average yield was 6.81 percent at the conclusion of the previous week, representing a 268bps increase. The 1-year T-bill yield specifically increased by 133 basis points to 6.39 percent, according to a study by Coronation Research.

In the primary auction, the 1-year yield increased to 6.46 percent, and investors sold out in the secondary market, pushing the yield up approaching its primary market counterpart, according to analysts at Coronation.

The shortest end of the curve was, however, what largely determined the overall T-bill yield last week. The yields on the 3-month (+602bps) and 6-month (+446bps) T-bills in particular have dramatically increased to 9.50 percent and 8.62 percent, respectively. Because 3- and 6-month yields are greater than 1-year yields, a portion of the yield curve has been inverted.

According to economists, banks may be compelled to invest more of their capital in treasury bills as a result of the rising yield on government bills, which might hurt lending to the real economy.

Given the rising inflation rate and the most recent 150 basis point increase in the monetary policy rate, the rate on Treasury bills has been climbing for some time. Investors are still looking in vain for positive real returns, according to Taiwo Oyedele, head of PwC’s tax and corporate advising services.

According to him, this rate increase will mitigate the decline in the real value of money market investments and is anticipated to encourage additional saves, but at a higher cost to companies looking to borrow money.

Oyedele remarked, “Unfortunately, the cost of servicing the government’s debt will also rise, reducing the amount of money available to pay government programs.”

Uche Uwaleke, a professor of capital markets and the head of the Association of Capital Market Academics of Nigeria, commented on the situation and stated that increased government borrowing is mostly to blame. According to him, the rate must be high in order to attract investors.

Second, given the rising inflation rate, the CBN might combine it with OMO bills to absorb extra liquidity introduced into the system by the Federation Account Allocation Committee (FAAC).

High TB rates will not bode good for the economy, as was the case in our previous history. The banks would prefer to store money in TBs than take the risks of lending to the private sector. Therefore, financial intermediation will suffer, he warned.

READ MORE: Heathrow Airport Limits Number Of Daily Passengers

The rise in yields, according to Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, was caused by rising inflation. He added that this will compensate investors in fixed income, allowing them to maintain their interest in securities.

According to the National Bureau of Statistics, Nigeria’s inflation increased to 18.60 percent year-over-year in June from 17.71 percent in May.

The Coronation report claims that a persistent liquidity crunch in the banking system is what caused the inversion.

Inflows from sources including FAAC allocations to states and local governments, T-bill and OMO maturities, and FGN bond coupons have recently been overshadowed by system outflows like the Cash Reserve Requirement, Open Market Operations, T-bill, and FGN bond auction debits.

The banks increased their deposit rates as soon as possible last week, and they also sold off short-term liquid securities including CBN Special Bills and short-dated T-bills, which contributed to the sharp rise in yields.

This has typically been a transient event, and this situation is unlikely to be any different. As a result, assuming system liquidity returns to a surplus position, we anticipate banks’ deposit rates to drop soon and a correction at the short end of the yield curve, according to the research.

“However, given that rates on 1-year T-bills have been climbing since mid-March, when they were slightly under 4.00 percent, it appears that the CBN is allowing a slow increase in these rates. Further along the curve, we maintain that an increase in the government deficit is likely to result in an increase in naira-denominated government borrowing this year, which implies an increase in market interest rates, according to the analysts.

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Financial market statistics reveal that less than two months after the Central Bank of Nigeria (CBN) raised the benchmark interest rate by 150 basis points (bps), the yield on Nigeria’s government bills surged to 7 percent from roughly 3 percent.

The benchmark interest rate was raised from 11.5 percent to 13 percent on May 24, 2022, as a result of growing inflation.

Investors are considered as having a good opportunity to lower their negative real returns on investment as a result of the development.

Ayodeji Ebo, managing director/chief business officer, Optimus by Afrinvest, told BusinessDay over the phone that the move is advantageous for investors since it lessens the negative effects of rising inflation on their investments and allows them to earn higher returns.

T-bill yields on the secondary market averaged 4.13 percent a month ago. The average yield was 6.81 percent at the conclusion of the previous week, representing a 268bps increase. The 1-year T-bill yield specifically increased by 133 basis points to 6.39 percent, according to a study by Coronation Research.

In the primary auction, the 1-year yield increased to 6.46 percent, and investors sold out in the secondary market, pushing the yield up approaching its primary market counterpart, according to analysts at Coronation.

The shortest end of the curve was, however, what largely determined the overall T-bill yield last week. The yields on the 3-month (+602bps) and 6-month (+446bps) T-bills in particular have dramatically increased to 9.50 percent and 8.62 percent, respectively. Because 3- and 6-month yields are greater than 1-year yields, a portion of the yield curve has been inverted.

According to economists, banks may be compelled to invest more of their capital in treasury bills as a result of the rising yield on government bills, which might hurt lending to the real economy.

Given the rising inflation rate and the most recent 150 basis point increase in the monetary policy rate, the rate on Treasury bills has been climbing for some time. Investors are still looking in vain for positive real returns, according to Taiwo Oyedele, head of PwC’s tax and corporate advising services.

According to him, this rate increase will mitigate the decline in the real value of money market investments and is anticipated to encourage additional saves, but at a higher cost to companies looking to borrow money.

Oyedele remarked, “Unfortunately, the cost of servicing the government’s debt will also rise, reducing the amount of money available to pay government programs.”

Uche Uwaleke, a professor of capital markets and the head of the Association of Capital Market Academics of Nigeria, commented on the situation and stated that increased government borrowing is mostly to blame. According to him, the rate must be high in order to attract investors.

Second, given the rising inflation rate, the CBN might combine it with OMO bills to absorb extra liquidity introduced into the system by the Federation Account Allocation Committee (FAAC).

High TB rates will not bode good for the economy, as was the case in our previous history. The banks would prefer to store money in TBs than take the risks of lending to the private sector. Therefore, financial intermediation will suffer, he warned.

READ MORE: Heathrow Airport Limits Number Of Daily Passengers

The rise in yields, according to Ayodele Akinwunmi, relationship manager, corporate banking at FSDH Merchant Bank Limited, was caused by rising inflation. He added that this will compensate investors in fixed income, allowing them to maintain their interest in securities.

According to the National Bureau of Statistics, Nigeria’s inflation increased to 18.60 percent year-over-year in June from 17.71 percent in May.

The Coronation report claims that a persistent liquidity crunch in the banking system is what caused the inversion.

Inflows from sources including FAAC allocations to states and local governments, T-bill and OMO maturities, and FGN bond coupons have recently been overshadowed by system outflows like the Cash Reserve Requirement, Open Market Operations, T-bill, and FGN bond auction debits.

The banks increased their deposit rates as soon as possible last week, and they also sold off short-term liquid securities including CBN Special Bills and short-dated T-bills, which contributed to the sharp rise in yields.

This has typically been a transient event, and this situation is unlikely to be any different. As a result, assuming system liquidity returns to a surplus position, we anticipate banks’ deposit rates to drop soon and a correction at the short end of the yield curve, according to the research.

“However, given that rates on 1-year T-bills have been climbing since mid-March, when they were slightly under 4.00 percent, it appears that the CBN is allowing a slow increase in these rates. Further along the curve, we maintain that an increase in the government deficit is likely to result in an increase in naira-denominated government borrowing this year, which implies an increase in market interest rates, according to the analysts.

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Our newsletter gives you access to a curated selection of the most important stories daily.

Specially For You

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