Article summary
- The recent Treasury Bills auction indicates investors bid as high as 19% for one-year Treasury Bills, which may make them a more attractive option for risk-averse investors seeking a safe investment.
- The increase in the Treasury Bills rate could lead to a decrease in demand for investment in Nigerian stocks as investors may choose to invest in Treasury Bills instead.
- An increase in the Treasury Bills rate could lead to an increase in borrowing costs for businesses and individuals, as the rate on Treasury Bills is often used as a benchmark for other lending rates.
Results from the Treasury Bills auction of 12 of April 2023 indicate investors bid as high as 19% for one-year treasury bills expected to mature on the 11th of April 2024.
Investors seeking the risk-free treasury bills made offers valued at N273.4 billion even though the amount on offer was N143.9 billion. The range of bids was between 10-19% but the central bank closed at a stop rate of 14.7%.
This was also the stop rate at the end of the last trading date on the 29th of March. It was about 9.4% on the 15th of March.
True yield as high as 17.3%
The true yield for the one-year auction is as high as 17.3% by our estimates as treasury bills interest is typically paid upfront. This means the true return for investing in the primary option of this treasury bill will earn a 17.3% return.
The 182-day treasury bill of N2.5 billion was on offer and the subscription was N3 trillion while the 91-day bill has an offer of N3.1 trillion and subscriptions valued at N3.7 trillion were made. The central bank also allotted N2.7 billion.
Treasury bills yield has been rising since the central bank started its rate hikes in response to the high inflation rate. With the inflation rate at 21.9%, the central bank has increased its benchmark monetary policy rate to 18%.
What this means for investing
The attractiveness of Risk-Free Investment: Treasury Bills are considered to be one of the safest forms of investment since they are backed by the government. As the rate on Treasury Bills increases, it becomes more attractive to investors who are seeking a risk-free investment as they may choose to invest in Treasury Bills rather than other riskier investment options.
Opportunity Cost for stocks: As the rate on Treasury Bills increases, the opportunity cost of investing in other options such as stocks increases. For instance, if an investor is considering investing in a stock that has a lower expected return than the Treasury Bills rate, they may choose to invest in Treasury Bills instead. This could result in a decrease in demand for investment in Nigerian stocks.
Borrowing Cost: When the Treasury Bills rate increases, it also affects the borrowing cost for businesses and individuals. This is because the rate on Treasury Bills is often used as a benchmark for other lending rates. As a result, an increase in the Treasury Bills rate may lead to an increase in borrowing costs for businesses and individuals.
Bond Market: The Treasury Bill rate can also impact the bond market. When Treasury Bills rates increase, the yields on bonds tend to increase as well. This is because investors may choose to invest in Treasury Bills instead of bonds. As a result, bond prices may fall, and yields may rise.
Impact on the exchange rate: Higher Treasury Bills rates can also increase the demand for the naira, as investors who want to invest in Treasury Bills will need to do so with the local currency. This increased demand can lead to an appreciation of the exchange rate. Higher treasury bills yields are also more attractive for foreign investors to invest in the country. This is because they can earn higher returns on their investments, which can increase the flow of dollars into the economy, thus positively impacting the exchange rate.
Well explained! This may not bode well for the equity market at the moment but it may present a good entry point for favourite stocks.
Thank you.