Investors in the Central Bank of Nigeria’s treasury bills have invested a total sum of about N390.9 billion in treasury bills since the apex bank raised its benchmark monetary policy rate (MPR) to 13% and inflation rate at 17.7% and rising.
This is for the period between May 25th and June 15th. The CBN changed its monetary policy rate on the 24th of May 2022.
A total of N777.3 billion in subscriptions was tendered by investors representing about 198% oversubscriptions from the N362.2 billion initially offered by the central bank.
Investors seeking the 365 days treasury bills formed a significant portion of the bids with about N739 billion subscription value compared to the N335 billion offered by the central bank. The CBN only took just N380.7 billion of the total value of bids submitted by investors for 365 days while the balance N10.2 billion was for 91 days and 182 days combined.
Why is this important?
With Nigeria’s monetary policy rate now at 13% and the inflation rate at 17.7%, investors placing money in treasury bills will see their investments wiped out by inflation.
- For example, the one-year treasury bill which is most sought after by investors went for a stop rate of 6.49%, 6.44% and 6.07% in the bids conducted on May 27th, June 8th and June 15th respectively.
- Assuming the inflation rate of 17.7%, the negative yield is about 11.21%. Factor in further risk to inflation and it will seem that the loss in purchasing power could even be larger.
- The people who invest in treasury bills are pension funds and other institutional investors, so one wonders why savvy investors might be placing money in treasury bills despite the negative returns.
- Whilst the pace of subscription has declined when compared to the first quarter of the year, it is still significantly high considering the negative returns
Why they are investing for negative yields
One reason could be the fear that the turmoil in the global financial markets could spill into Nigeria thus affecting equities and other less safe investments.
- For some of these investors, they are better off keeping their funds in treasury bills despite the negative real return when compared to equities that could even lose more in value.
- It is perhaps not surprising that the Nigerian Stock Market is having one of its worst runs in weeks. Investors appear to be cycling out of equities and pushing their money into treasury bills.
- Another reason is that pension funds are still obligated to place most of their funds in risk-free assets such as treasury bills and FGN bonds regardless of the interest rates on offer.
- It is also important to note that the current interest rates are much improved compared to the first quarter of the year.
Dollar value
This year alone, investors have staked a total of N2 trillion in one-year treasury bills with the earliest expected to be liquidated by January 2023.
- By the time this mount is returned, the dollar value will have dropped considerably if further depreciation of the naira occurs.
- The exchange rate has so far called by about 4% year to date. Interest rate has hovered between 4% and 6.49% for these bills