Meristem Securities has asserted that interest rates will remain low until, at least, the end of H1 2021.

This statement was made at the recently held webinar on Global Economy and Outlook, which the company themed: Bracing for a Different Future.

Although the company acknowledged that there is mounting pressure for upward movement in yields from several stakeholders, it appears the company concurs nothing concrete is in sight.

This line of reasoning seems to have influenced their decision to advise investors to move away from Treasury instruments.

What they are saying

Meristem advises that:

• “Buy and hold strategy investors seeking to generate above average returns should move away from risk free Treasury instruments and focus on investment grade commercial papers and bonds which satisfy investment objectives.”
• “Active traders with higher risk appetite are advised to focus on high-yield short duration instruments, which would be re-invested into a higher yield environment should rate reversals occur.”

The advice regarding shunning Treasury instruments appears to be in order, considering that treasury bill rate has been declining, with the latest figure — November 2020 — 0.03% as per the CBN monthly interest rate data.

Further checks from the Debt Management Office website, indicates that the latest figures for Eurobonds and Diaspora bond fall short of the fixed yield at issue for all the different categories of bonds in issue.

What you should know

Latest figures from the CBN’s monthly interest rate indicate that:

• Treasury bill rate has been on a steady decline for six months, down to 0.03% since the last rise (2.47%) in May 2020.
• Fixed deposit rates (one, three, six and twelve months) have also been declining – the latest figures for these indicate that in November 2020, one-month deposit rate was 1.92%, 2.9% for three months, 2.84% for six months, and 4.89% for 12 months.
• Compared with the corresponding period in 2019, the figures indicate that these rates fell by 75%, 66%, 71% and 49% respectively.

The Debt Management Office (DMO) has announced the offer for subscription, Federal Government Bonds (FGN Bonds), valued at N150 billion for January 2021.

This is according to a notification released by the DMO and seen by Nairametrics. The latest offers come in three tranches:

• N50, 000,000,000 – 16.2884% FGN MARCH 2027 (10-Year Re-opening).
• N50, 000,000,000 – 12.50% FGN MARCH 2035 (15-Year Re-opening).
• N50, 000,000,000 – 9.80% FGN JULY 2045 (25-Year Re-opening).

Other key highlights of the recent offer

• Units of Sale: N1, 000 per unit subject to a minimum subscription of N50,001,000 and in multiples of N1,000 thereafter.
• Auction Date: January 20, 2021.
• Settlement Date: January 22, 2021.
• Interest Payment: Payable semi-annually.

What you should know

• Checks by Nairametrics revealed that the latest FGN Bond offer across three maturities is N90billion more than amount offered in the previous month (December 2020) at N60billion, indicating an increase of 150%.
• Interested investors were advised to contact offices of any of the listed 13 Primary Dealer Market Makers (PDMMs).
• The DMO reserves the right to alter the amount allotted in response to market conditions.
• FGN Bonds are debt securities (liabilities) of the Federal Government of Nigeria (FGN), issued by the Debt Management Office (DMO) for and on behalf of the Federal Government. The FGN has an obligation to pay the bondholder the principal and agreed interest as and when due.

As the low-interest regime that characterized most of 2020 continues with no immediate sign of an increase, pension fund managers have also continued to rid their portfolios of treasury bill investments.

Analysis of the recently released September 2020 edition of Pension Fund assets, by the Pension Commission of Nigeria, PenCom, shows that pension fund managers reallocated their assets away from treasury bills to FGN Bonds.

READ: Nigeria’s Micro Pension industry: A gold mine waiting to be tapped

In the month of September 2020, according to the latest report, pension fund managers closed out of treasury bill positions worth N0.224 trillion while loading up on FGN bonds worth N0.254 trillion. Since the beginning of 2020, pension fund managers have moved out about N1.112 trillion of treasury bills investments into mostly FGN Bonds.

READ: FG posts 27% revenue shortfall in 2020 as budget deficit hit N6.1 trillion

At the beginning of 2020, total pension fund assets invested in treasury bills stood at N1.88 trillion, but that has fallen to N0.78 trillion as at the end of September 2020. Put in another way, as at the end of 2019, 18.4% of pension fund assets were invested in treasury bills but as at September 30, 2020, pension funds’ treasury bill investment stood at 6.7%

READ: Pension Fund Assets hits N9.3 trillion as investment in FGN securities drops

Implications for domestic borrowing and monetary policy

Treasury bills serve a whole lot of purposes for the government. They are used as a means for the government to borrow to cover short term budgetary deficits as well as a means for the Central Bank to manage the supply of money and its inflationary effects.

READ: Worry for PFAs as pandemic-induced unemployment lowers new pension accounts

With the increasing and seeming lack of interest by pension fund managers, who, usually are big players in the treasury bill market, the government may find it a bit problematic raising the much-needed domestic borrowing from them.

READ: Nigeria’s Eurobond yield hit 12.8% as investors flee emerging markets

In like vein, the Central Bank’s ability to implement monetary policies through treasury bills and others, open market operation, may also suffer. May be, fiscal policy may become a more potent instrument of economic management, if that happens.