Nigeria’s one-year treasury bills (T-bills) experienced a decline in demand despite increases in yields by the Central Bank of Nigeria (CBN). The CBN adjusted its auction calendar, leading to a yield rise from 22.52% to 24.90%. However, demand fell to its lowest this year at N861 billion. Analysts attribute this decrease to liquidity issues and foreign investor caution, highlighting a strained market environment.
The demand for Nigeria’s one-year treasury bills (T-bills) has significantly declined despite the Central Bank of Nigeria’s (CBN) efforts to enhance yields in recent auctions. The CBN unexpectedly adjusted its auction calendar to include an extra sale on Wednesday, during which yields on one-year T-bills rose from 22.52 percent to 24.90 percent. This marks a noteworthy increase, resulting in a positive real return of 1.72 percent, the first since May 2020.
However, Wednesday’s demand fell sharply to N861 billion, the lowest for this year, compared to N1.5 trillion at early 2024’s first auction. This decline transpired despite the offer being the largest since February 2024, amounting to N800 billion. Previous peaks saw demand reach N3.2 trillion against a supply of N670 billion.
Tajudeen Ibrahim, head of research at Chapel Hill Denham, pointed out that limited system liquidity is a primary factor affecting domestic demand. He noted that foreign portfolio investors (FPIs) favor OMO bills over T-bills, suggesting that the current yield structure, despite its attractiveness, does not adequately incentivize FPI engagement.
Ibrahim mentioned that the CBN’s Wednesday auction aimed to bridge an N800 billion shortfall in its initial first-quarter T-bills calendar. Matilda Adefalujo, a fixed-income trader, reiterated that low liquidity heavily influences demand, underscoring that the auction aimed to signal T-bills’ ongoing attractiveness with strong yields.
Earlier this year, foreign banks had displayed optimism regarding Nigeria’s T-bills. J.P. Morgan highlighted, “We remain long on Nigeria’s T-bills as reform momentum begins to yield results. However, this trade is more about taking a position on the naira.” The naira performed well initially but entered a depreciation phase, coinciding with the drop in T-bill demand.
Factors like rising global tariff tensions have caused increased investor caution, leading to a preference for safer domestic assets. Some analysts indicated that FPIs have been exiting the T-bills market significantly, prompting the CBN to raise OMO bill yields to mitigate capital flight.
Kingskin Okojie, a treasury analyst at Access Bank, emphasized the correlation between declining T-bill rates and FX market volatility, noting that falling yields lead FPIs to liquidate holdings for naira repatriation. Conversely, an increase in yields may slow the exodus of FPIs as they seek attractive returns. Despite the additional auction, the CBN sold only N436.72 billion worth of one-year T-bills, with total T-bill sales for 2024 amounting to N4.7 trillion. Limited interest also showed in the 182-day and 91-day T-bills, with yields rising accordingly.
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The decline in demand for Nigeria’s T-bills, despite rising yields, reflects significant liquidity constraints within the market. The Central Bank’s interventions, including an unexpected auction, have not produced the desired results in fostering demand. As foreign investors reassess their positions amidst currency volatility and safety concerns, the outlook for T-bills remains challenging. Continuous monitoring of liquidity and investor sentiment will be critical in determining future trends in the T-bills sector.
Original Source: businessday.ng
