Fixed-income investors seeking high-yielding securities in the markets will not be disappointed in the first half of 2021 as analysts expect the rates on the Federal Government short-term debt instruments to maintain its recent uptick.
A Businessday poll of five market analysts expects the rates on the less risky government treasury Bill (T-bills) to reach 9 percent before the end of June this year. Weeks after the Central Bank of Nigeria (CBN) shocked the market with a 10.10 percent stop rate for the 362-day OMO bill, the highest levels seen in almost a year, fixed-income investors demanded higher rates for T-bills.
“We expect the rate to approach 8-9 percent before this uptrend subsides,” Ayodeji
Ebo, head, retail investment, Chapel Hill Denham, said.
After hitting a four-year low of near-zero percent in 2020, yields on the Federal Government risk-free treasury bills climbed to more than 13 months high in March.
According to the T-bills auction result for March 10 2021, investors bid at a rate as high as 8 percent for the 91day bill, 9.5 percent and 10.5 percent for the 182-day and 364-day bills, respectively, but CBN settled at 2 percent, 3.5 percent and 6.5 percent, respectively. The stop rates for the 91-day and 182-day bills stayed flat but the 364-day bill increased by 100 basis points compared to the result of the previous auction.
“The increase in the stop rates can be linked to the hike in CBN OMO rates some weeks ago. Investors are bidding at higher rates and the DMO also needs to raise the cut off rate to fill some of the orders,” a Lagos-based market analyst said.
While interest rates have always been high in Nigeria due to the monetary system in vogue since 2009 which sought to use FGN bonds/ T-bills and OMO bills as a means of attracting US dollar to stabilise the naira, the recent OMO policy by the Central Bank which prevents domestic investors from participating in the auction has sent yields to its worst record.
From October 23, 2019, the apex bank banned nonbank locals (individuals and corporates) from participation in OMO auction at both the primary and secondary market. The CBN’S policy is largely in line with its drive to divert liquidity away from risk-free instruments to the real sector.
The CBN policy sent yields on government instrument to their record-low levels and as a result, investors reported a negative return in real terms amid the country’s rising double-digit inflation rate.
After touching its lowest record since 2016 in the fourth quarter of last year, rates on T-bills climbed to 13 month-high of 6.5 percent for the 364-day bill, as compiled from Nigerian treasury bills primary market auction results for March 10 2021. From a yield record low level of 4.048 percent in November 2020, Nigerian 10 years’ government bond climbed to 10.62 percent in March 2021.
The recent rise in the yield on government instrument is cheering news for domestic investors who for almost two years had a return that was much lower than Nigeria’s inflation rate.
“This is positive for fund managers as well as Nigerians amidst rising inflation rate as the negative real return has reduced significantly compared to the beginning of the year,” Ebo said.