Demand for Nigeria’s one-year T-bills is declining despite rising yields, attributed to liquidity constraints. A recent CBN auction raised yields to 24.90% but saw demand drop to N861 billion, the lowest this year. Key factors include investor caution due to naira volatility and limited system liquidity.
The interest in Nigeria’s one-year treasury bills (T-bills) has been steadily decreasing despite the Central Bank of Nigeria (CBN) attempting to raise yields in recent auctions. In a surprising adjustment, the CBN included an additional auction this week, pushing yields on one-year T-bills to 24.90%, a notable increase from 22.52%. This marks a consecutive rise, providing a real return of 1.72%—the first positive return since May 2020.
Despite the heightened yields, demand for the one-year T-bills plummeted to N861 billion this week, the lowest this year, contrasting sharply with N1.5 trillion at the initial auction of 2024. This decline is occurring even as the offer amounting to N800 billion remained the largest since February 2024. At one point, demand for T-bills peaked at N3.2 trillion against a supply of N670 billion.
According to Tajudeen Ibrahim, head of research at Chapel Hill Denham, the declining demand is primarily influenced by limited system liquidity. He noted, “Domestic demand is largely dictated by system liquidity.” He also indicated that while the one-year bill’s yield surpasses 24%, attracting foreign portfolio investors (FPIs), many still prefer investing in Open Market Operations (OMO) bills which align better with their interests.
Ibrahim further explained that the CBN’s latest auction aimed to address a shortfall of N800 billion in the first-quarter T-bills. Matilda Adefalujo, a fixed-income trader, reiterated that low liquidity is a critical factor affecting demand. She mentioned, “The additional auction was introduced to address multiple concerns, including signalling that NT-bills remain attractive with strong yields.”
Foreign interest in Nigeria’s T-bills shifted earlier this year, with J.P. Morgan expressing optimism about the potential of T-bills as economic reforms take effect. However, since March, the Nigerian naira has depreciated from N1,502 to N1,580, influencing T-bill demand negatively, as investor caution grows amid global tariff tensions.
Analysts observed that interest from FPIs in T-bills is decreasing, with some moving toward safer domestic assets. An analyst from Capitalfield noted that rising exchange rates prompted FPIs to withdraw substantial funds, while the CBN increased OMO yields to mitigate capital flight. Kingskin Okojie, a treasury analyst at Access Bank, pointed out the relation between declining T-bill yields and FX volatility, emphasizing the risk of FPIs liquidating holdings for repatriation. He stated that higher yields might deter FPI exits by offering attractive returns.
Despite the surprise auction, the CBN sold only N436.72 billion worth of one-year T-bills, amounting to a total of N504 billion sold across all tenors on Wednesday. Total T-bill sales for 2024 now stand at N4.7 trillion, although interest in the shorter-term T-bills remains limited, as evidenced by the disappointing sales numbers from the 91-day and 182-day bills.
Overall, the market is grappling with liquidity constraints and fluctuating investor sentiments in the wake of a depreciating naira and uncertainty in the foreign exchange market, impacting T-bill demand significantly.
In summary, Nigeria’s T-bill demand is facing significant challenges due to liquidity constraints and currency volatility, leading to decreased investor interest despite rising yields. The CBN’s efforts to raise T-bill yields and introduce additional auctions reflect attempts to salvage market confidence. Foreign portfolio investors are becoming cautious amid a fluctuating naira, which influences their investment decisions. While there are opportunities with attractive returns, the overall demand remains sluggish due to systemic liquidity issues.
Original Source: businessday.ng
