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Friday, March 24, 2023

One-Year Treasury Bills now Yield Below 1% in Nigeria’s New Normal

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Welcome to the bizarre world of fixed income investing in Nigeria (Africa’s largest economy) where a Treasury Bill auction held by the Central Bank this week saw yields falling below 1 percent across all tenors (91, 182 and 364 day).

Meanwhile the latest inflation rate according to the National Bureau of Statistics jumped to 13.7 percent in September. In essence Investor were willing to lend the Government tons of (other people’s money) and receive negative real returns for their troubles.

The 91-Day paper where the CBN offered to sell N49.8 billion worth of bills saw subscription of N84.88 billion from Banks, Pension Funds, Insurance firms and other institutional investors, equivalent to a bid-to-cover ratio of 1.7.

Range of bids were 0.18 percent to 1.2 percent (an indication of the desperation of some of the investors), while the stop rate was 0.34 percent.

For the 182-Day paper the N10.6 billion on offer saw total bids of N41.64 billion for a bid-cover-ratio of 3.92. The bids ranged from 0.4 to 1.29 percent but the CBN put its stop rate at 0.5 percent.

Investors response to the 364-Day paper was perhaps most interesting. The CBN had N93.9 billion on offer, while total bids hit a high of N694.9 billion for a bid-to-cover ratio of 7.4. The bids ranged from 0.29 – 2.3 percent while the stop rate stood at 0.98 percent.

It perhaps doesn’t hurt that the fund managers making these bids will still get paid whether they outperform their benchmarks for the year, or give poor Pension Fund contributors a positive real return on investments for their nest eggs.

Most fund managers (with the flexibility to do so) could probably turn stock pickers and buy some blue chip stocks on the Nigerian Stock Exchange (NSE), some of which still sport dividend yields of between 8 percent and 12 percent.

Pension Funds Administrators or PFAs as they are called are probably best positioned to do so, but sadly they are still largely underweight domestic equities, according to a recent MoneyCentral report.

So why are yields crashing in Nigeria, even as inflation surges to record highs? We had explored it earlier on MoneyCentral where we identified the Central Bank of Nigeria’s financial repression policies as being the major culprit.

In today’s world of zero and negative interest rates savers and any form of fixed income investors are totally penalized, so perhaps it is not news that Nigeria is going that route.

However, what is different in the Nigerian situation is the persistent high inflation in the country hand in hand with cratering yields.

We believe at MoneyCentral that this CBN enabled state of affairs will not end well.

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