Treasury Bills has been one of the most sought-after investments in Nigeria for the better part of two years. In this time, we have seen true yields rise to as high as 21% as the CBN raced to mop up liquidity from the economy. Most investors, retain, institutional and even banks were all part of this great bonanza.
The CBN is obviously in the driver’s seat for setting monetary policy in the country and has started reducing the amount of cash it is sucking out of the economy. Treasury, bills which were its main monetary policy tool for keeping rates high and exchange rate stability is now being sold in a manner that most investors are now terming undesirable for their investment needs. Rates are dropping fast and soon we could be back to single-digit interest rates for Treasury bills.
If investors are worried about these cutbacks then the latest Treasury Bills auction announced by the CBN should set some alarm bells ringing. According to the CBN’s latest Treasury Bills Calendar for the second quarter of 2018, it will be selling a total of N482 billion worth of Treasury Bills for the period while it will be paying back about N964 billion worth of Treasury Bills. That brings the net return to the economy of a sum of about N482 billion.
In simple terms, the CBN is rolling over half of the amount of Treasury Bills that have fallen due, whilst it is not borrowing any new funds. Last quarter, the CBN returned about N185 billion to the economy. In the 4th quarter of 2017, it rolled over everything that matured. What about interest rates?
As the CBN cuts back on fresh borrowings, interest rates have fallen over the past one year. See chart below
Faced with an exchange rate crisis that was getting out of control, the Central Bank focussed on tightening monetary policy as a means of defending the Naira. To this end, the CBN raised interest rates high to get investors to buy Nigerian securities denominated in Naira. In economics, it is believed that a higher interest rate helps maintain exchange rate stability. This is because as interest rates for Naira denominated assets rise, there will be fewer Naira chasing the dollar, thus snuffing out the pressure to own what was then the most prized asset in the country.
Since last April, the exchange rate has stabilized to N360 and within weeks, we would have achieved exchange rate stability for one full year. Also, external reserves have risen to about $46 billion and foreign investors have increased capital importation into the country. The government has also increasingly relied on foreign borrowing to improve its liquidity stance while tapering off on reliance on naira debt. The result is a steady cut back in the Treasury Bills volumes and a corresponding drop in rates.
What next for Investors
As the CBN shifts focus away from higher yields and aggressive defense of the exchange rate, yields are likely to continue to drop as we have seen in recent months. Investors are taking note of these moves and are responding in kind. Rather than pack their money in risk-free low yielding government securities, we are seeing an increasing attraction towards medium to high yielding assets such as corporate bonds and stocks.
This trend has already contributed to the surge in demand for stocks, helping the market hit an all-time peak market capitalization of over N15 trillion. More companies are taking a bet on debt and rather than explore strenuous but yet punitive bank lending, they are gravitating towards corporate bonds.
Some investors we spoke to have indicted their switch from Treasury Bills to higher-yielding assets just as they have one eye set on the impact of the CBN’s cut back on the stability of the exchange rate. As one person aptly remarked, the Treasury Bills Bonanza is over, it is time to move on.