The latest data from Nigeria’s Treasury bill auction shows that Nigeria’s 364-day reduced by 2%. On the other hand, Stop rates moderated slightly for the 91-day tenors and 182-day tenors. The 91-day bills had stop rates of 1 % and 182-day bills also went by 1%.
At the auction, the Debt Management Office (DMO) sold N12.76 billion on the 91-day paper, N4.5 billion on the 182-day, and N107.6 billion on the 364-day bill despite huge demand from Investors.
What you need to know
Basically, when the government goes to the financial markets to raise money, it can do it by issuing two types of debt instruments – Treasury Bills and Government Bonds. Treasury bills are issued when the government needs money for a short period, while Bonds are issued when it needs debt for more than say five years.
- The issuance of treasury bills is also used as a mechanism to control the circulation of funds in the economy.
- Treasury bills have a face value of a certain amount, which is what they are actually worth.
- However, they are sold for less. For example, a bill may be worth N10,000, but you would buy it for N9,600.
- Every bill has a specified maturity date, which is when you receive the money back.
- The government then pays you the full price of the bill (in this case N10,000), giving you the opportunity to earn N400 from your investment. The amount that you earn is considered as the interest, or your payment for lending money to the government.
- The difference between the value of the bill and the amount you pay for it is called the discount rate and it is set as a percentage.
What they are saying
Peter Omoregie, CFA, Head Proprietary Trading at CardinalStone Partners Limited, in a phone interview with Nairametrics, explained why investors oversubscribed Nigeria’s Treasury bills in spite of low rates.
“The CBN continues with de-leveraging its balance sheet and favoring its growth policies over the attraction of FPI money, which is good for businesses and the country at large. Surprisingly, we had a huge subscription on the long end at these low rates. The local institutional investors are addicted to Tbills like a junkie on cocaine, they don’t know how or when to stop.”
Why this matters
The massive disparity between the subscriptions and the offers recorded suggests investors are willing to earn a negative real return, compared to the higher risk in other assets such as stocks and real estate. Basically, the CBN sells T-bills on a bi-weekly basis to investors and it is one of the safest investments available. Interests are paid upfront and the principal paid in full upon maturity.
Explore Data on the Nairametrics Research Website