Investors’ interest in the Federal Government’s monetary instrument, the Nigeria Treasury Bill (NTB) has recorded a significant decline with 19 per cent, year-on-year, YoY, decline in sales to N1.35 trillion in the first five months of this year.
Money market dealers have attributed the development to the rebound in both yields and volume in the Open Market Operation, OMO, of the Central Bank of Nigeria, CBN, and other alternative investment instruments.
This trend, according to the dealers, will likely persist in the second half of the year, except the CBN raises interest rates on short tenured NTBs and also relaxes its liquidity mop-up in the interbank money market.
The NTB is issued by the Central Bank of Nigeria (CBN) to borrow from the investing public on behalf of the Federal Government (FGN).
Financial Vanguard analysis of the NTB (bills) auctions conducted by the CBN from January to May, showed that while the amount of bills offered by the apex bank increased to N1.54 trillion, representing 18 per cent increase when compared to the N1.3 trillion offered in the corresponding period of 2020, total subscription, which represents demand by the investing public, fell by 19 per cent, YoY, to N2.17 trillion in the five months to May 2021, from N2.64 trillion in the corresponding period of 2020.
Further analysis however revealed that most of the decline in sales and subscription was recorded in the short tenured NTBs namely 91-Days bills and the 182-Days bills.
Massive declines
During the five months to May 2021, total public subscription to the 91-Days bills fell by 67 per cent, YoY to N138 billion from N431 billion in the corresponding period of 2020, while the amount offered and sold by the CBN also fell respectively by 28 per cent and 18 per cent, YoY, to N138 billion and N158 billion from N163 billion and N218 billion in 2020.
Meanwhile, though the amount of 182-Days bills offered by the apex bank rose 24 per cent, YoY to N257 billion in the five months to May 2021 from N208 billion in the corresponding period of 2020, total public subscription and amount sold however fell respectively by 35 per cent and 51 per cent to N324 billion and N244 billion in the five months to May 2021 from N497 billion and N496 billion in the corresponding period of 2020
Similarly, though the amount of 364-Days bills offered by the apex bank rose 23 per cent, YoY to N1.15 trillion in the five months to May 2021 from N930 billion in the corresponding period of 2020, total public subscription and amount sold however fell respectively by 0.4 per cent and 0.2 per cent to N1.7 trillion and N952 billion in the five months to May 2021 from N1.71 and N954 billion in the corresponding period of 2020.
Low interest rate
Further analysis revealed that the sharp decline in the patronage for the 91-Days bills and 182-Days bills was due to the low interest rate (stop rate) for the bills which made them unattractive to investors.
For example, the average stop rate for the 91-Days bills during the period fell 800 basis points (bpts) to 1.8 per cent from 2.6 per cent in the corresponding period in 2020.
Similarly, the stop rate for the 184-Days bills fell by 200 bpts to 3.3 per cent during the five months to May 2021 from 3.5 per cent in the corresponding period in 2020.
On the contrary, the stop rate for the 364-Days bills rose by 2000 bpts to 6.9 per cent during the five months to May 2021 from 4.9 per cent in the corresponding period in 2020.
Why the decline
According to dealers who spoke to Financial Vanguard, the stop rates on the NTBs made them increasingly unattractive to investors especially given the availability of alternative investment options with higher interest rate.
“The major reason for the decline in investors’ participation is due to other available options with higher interest”, said Ayodeji Ebo, Head, Retail Investment, Chapel Hill Denham.
Explaining further, he said, “CBN raised OMO rate to 10.1 per cent earlier this year, which effectively reduced banks and foreign investors (FPIs) participation in the NTB market.
“We also observed that bank’s fixed deposit rates have increased to double digits this year compared to last year when banks rejected funds.
“Besides, the liquidity level in the financial system has remained very low this year compared to 2020, leading to double-digit interbank rates.
“These factors are responsible for the reduction in investors’ participation in the NTB Primary Market Auction”.
Similarly speaking, Chinwe Egwim, Senior Economist, Macroeconomic & Fixed Income Research, FBNQuest Capital, explained: “The decline in NTB subscriptions this year has mainly been on the 91-day and 182-day maturities.
“This is because of the low stop rates. Over the past two months, stop rates of the 91-day and 182-day bills have hovered around 2.0% to 2.50% and 3% to 3.5% respectively.
“Unlike the 364-Days bill which has jumped from 1.5% to 9.65% this year and has been oversubscribed and oversold, rates for the short and mid-tenor bills have remained stagnant. This points toward the Debt Management Office (DMO) interest in long term (364-Days and above) borrowing.”
Highlighting the role of inflation in the decline in patronage for the short tenured NTBs, Peter Elege, Managing Director, PFI Capital, said: “The yield curve in recent months has largely steepened as investors are looking for rates to hedge the current inflation rate, hence, shifting focus towards the long end of the curve (longer-tenured bills and bond market with higher returns).
“Investors have reduced taking long position in treasury bills as a result of their expectations of increased yields on the back of rising inflation.”
He also highlighted the impact of the liquidity mop up activities of the CBN, saying: “Significant activities will occur at the short end of the curve (NTB) when there is much liquidity in the market or higher/increasing rates.
“Unfortunately, none of these exists at the moment, as the liquidity is being dampened by a lot of CRR (Cash Reserve Requirements) debits alongside simultaneous auction occurrences, resulting in available funds being directed towards the long end of the curve as seen in the auction result of May 26, 2021 where 91-day and 182-day bills posted subscription rates of 20 per cent and 30 percent while that of the longer-tenured bill was oversubscribed by 140 per cent in line with the recent trends at recent NTB auctions.
“Additionally, the reason behind the decline could largely be attributed to the Special Bills released in March 2021, which was trading at circa six percent (6%) for a similar tenor with that of NTB.
Special Bill is currently trading at approximately 8% for a 90-day tenor when compared to the 90-day Treasury Bill at circa 2.5% interest rate.”
2021 year-end outlook
On the outlook for patronage for NTBs in the remaining period of the year, Elege stated: “As long as the monetary policy remains the same, we expect this trend to continue over the short term.”
Chinwe Egwim similarly stated: “A reversal (in the decline trend in patronage for NTBs) is only likely if the stop rates on the short and mid-end of the NTB curve increases, similar to those at the longer-end.
This, according to Ayodeji Ebo may not happen. “While we expect the liquidity level to improve in the second half of the year but we do not anticipate any significant increase in interest rates (on NTBs)”, he said.
