Investors pile into 1yr Nigeria T-Bills despite lower return

Investors overlooked lower interest rates on the one-year Nigerian Treasury Bill at Wednesday’s primary market auction, attempting to invest three times the amount that was up for sale.

Nigeria planned to borrow N140.8 billion from investors but received a total offer of N423.8 billion, three times the amount that was initially offered.

The strong demand was despite the government offering a lower interest rate compared to the last auction.
The stop rate at the auction was 6.99 percent compared to 7.25 percent at the previous auction.

Riding on investor appetite, the government ended up raising N230.3 billion in one-year T-Bills, N89.5 billion more than its initial offer.

The extra cash raised from the one-year bill more than made up for the lower than planned outturn of the 91-day and 182-day T-bills where the government raised N2.6 billion and N2.0 billion respectively as against the N3.1 billion and N6 billion initially planned.

Read Also: Investors expect lower returns ahead today’s T-bill auction

The government offered lower interest rates to investors because demand outweighed supply at a time when there’s high liquidity in the system and there’s too much money chasing few investment options.

Investors had expected lower interest rates at Wednesday’s auction even though they would have wished for better returns to compensate for high inflation.
The problem with settling for lower returns however is that it further widens the country’s negative real return on investment.

Inflation cooled for the sixth straight month in September to 16.63 percent but the pace of deceleration is not happening fast enough for investors who must manage a negative real return on their investment.

At 6.9 percent, the return on the one-year Treasury Bill leaves investors with a negative real return of -9.73 percent from 9.28 percent prior to the auction.

Ghana, for instance, has a real rate of return of around 6 percent.

The Nigerian government is keen to keep interest rates low in order to manage its ballooning debt service cost which was 72 percent of revenues in 2020, according to data from the Debt Management Office (DMO).

While the country will benefit from lower debt service costs, it also runs the risk of losing investors to other markets with real returns on investment.