The Central Bank of Nigeria‘s one-year treasury bills rate for the month of November jumped to 14.84% from 12% recorded in September 2022.
The jump followed the apex bank’s decision to raise the benchmark interest rate to 16.65%, its highest level since 2001.
According to the auction result seen by Nairametrics, the CBN initially intended to raise N139.89 billion for the one-year treasury but recorded a total subscription of N345.23 billion, thus an oversubscription of N205 billion. But the apex bank ended up allotting only N199.93 billion worth of treasury bills.
Effect of MPR hike: Recall that during the 288th MPC meeting, the CBN raised the monetary policy rate for the fourth consecutive meeting to its highest level in two decades.
- Specifically, the CBN raised the MPR by 150 basis points to 16.5% on 22nd November 2022, immediately triggering an uptick in the one-year treasury bills.
- The hawkish stance is to fight off Nigeria’s inflation rate which accelerated to a 17-year high of 21.09% in October 2022.
- It is, however, worth noting that despite the significant improvement in the t-bills rate, it produced a negative yield of 6.25%.
Highlights of the auction: The 91-day-tenor treasury bills recorded a stop rate of 6.5% and attracted a total subscription of N11.968 billion. The offer amount of N32.27 billion, while the allotment is 11.67 billion.
- Also, the 182-day treasury recorded a total subscription of N3.04 billion in contrast to the offer amount of N41.25 billion. This represents a subscription rate of 8%, while the stop rate stood at 8.05%.
Why it is rising: Interest rates for fixed-income instruments have increased since the CBN switched to a more hawkish stance on monetary policy, with increased participation in long-term debt instruments.
- Specifically, the Debt Management Office (DMO) raised a sum of N269.15 billion through its November 2022 FGB Savings bond issuance, representing a subscription rate of 152.9%, having issued at marginal rates of 14.75%, 15.2%, and 16.2% for the three tranches of issuances.
- The CBN monetary policy committee increased the benchmark interest rate further to encourage Nigerians to save and invest in the local currency rather than in foreign currency.
The end game: A rising yield on treasury bills is meant to help mop up liquidity from the private sector into the coffers of the central bank. This is meant to lead to the following;
- Reduce demand for forex in the hope that people will rather invest in high-interest low-risk government investment than buy forex.
- Reduce the amount of naira by chasing fewer goods in the hope that it will drive down inflation.
- Provide a source of funding for short-term government financing needs.
What it means for you: Nigerians with naira savings should consider buying treasury bills, especially the one-year rates as these opportunities will not last long.
- While hedging against the naira by owning dollar assets remains the best bet, holding on to treasury bills at 14% plus interest rate is a great yield
- It also means businesses seeking to give investors returns of about 20-25% will now have to contend with risk-free treasury bills. It probably makes better sense to buy treasury bills at 14% than invest in a risky investment with a 20% return.
- Retail investors will have to seek higher returns from fixed deposit investments. It is foolhardy accepting less than treasury bills for fixed deposits.
- Finally, borrowing rates are set to climb even higher. Best bet is to find ways to repay loans early enough.
