KEY POINTS
- Investors heavily oversubscribed one-year Treasury bills at the October 7 and October 14 auctions, according to figures reported by NAN.
- Experts attribute the preference to expectations of lower interest rates, attractive yields and the relative safety of government securities.
- The 364-day bill’s stop rate rose slightly to 15.90 per cent at the October 14 auction, from 15.85 per cent previously.
- Strong demand could support government borrowing, but experts warn that high returns on government securities may compete with financing for businesses.
MAIN STORY
Investors’ strong preference for one-year Treasury bills reflects expectations about the future direction of interest rates and a desire to secure current returns for longer, according to financial experts.
Chukwudi Nga, Managing Director and Chief Executive Officer of MorganCapital Securities Ltd, and Dr Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, gave the assessment in separate comments to the News Agency of Nigeria (NAN) in Lagos on Sunday.
The preference was evident at the October Treasury bill auctions, where demand for the 364-day instrument significantly exceeded the amount offered by the government.
At the October 7 auction, the one-year bill attracted subscriptions of about ₦1.683 trillion against an offer of ₦700 billion. By comparison, the 91-day and 182-day bills attracted subscriptions of ₦39.42 billion and ₦46.87 billion, respectively, against offers of ₦100 billion each.
The pattern continued at the October 14 auction, when subscriptions for the 364-day bill reached about ₦982 billion against an offer of ₦350 billion.
However, the stop rate on the one-year instrument rose slightly to 15.90 per cent from 15.85 per cent at the previous auction. The stop rates on the 91-day and 182-day bills remained at 15.50 per cent and 15.80 per cent, respectively.
Nga said the preference for the longer-tenor instrument was not necessarily driven by a substantially higher return. At the October 7 auction, he noted, the difference between the stop rates on the 182-day and 364-day bills was only five basis points.
He said investors might be willing to commit their funds for longer because they expect yields to decline, allowing them to secure current returns rather than reinvest later at potentially lower rates.
Yusuf similarly attributed the trend to expectations of further monetary easing, attractive yields and the relative safety of government securities.
The investment decisions come after the Central Bank of Nigeria (CBN) reduced its Monetary Policy Rate from 26.5 per cent to 23 per cent at its September Monetary Policy Committee meeting.
Nigeria’s headline inflation rate also eased to 14.63 per cent in September from 15.39 per cent in August, according to the National Bureau of Statistics.
Although these developments have influenced expectations about future interest rates, they do not guarantee further monetary easing or a decline in Treasury bill yields. Future rates will also depend on inflation, monetary policy decisions, government borrowing requirements and liquidity conditions.
Nga said one-year Treasury bills could offer investors greater certainty about nominal returns if they held the instruments until maturity. Investors who repeatedly purchase shorter-tenor bills, by contrast, face reinvestment risk if rates fall before their next investment.
He cautioned that the longer-tenor instrument might not suit investors who need access to their funds before maturity. Such investors could sell their holdings in the secondary market, but the price received would depend on prevailing market conditions. If market yields rise, they could incur a loss on the sale.
Inflation is another consideration because the nominal return on a Treasury bill does not necessarily translate into an equivalent increase in purchasing power.
The preference for longer-dated bills also has implications for government borrowing. Nga said strong demand could help the government raise substantial funds without necessarily increasing borrowing costs.
At the October 7 auction, the government allotted ₦885 billion in 364-day bills against an initial offer of ₦700 billion, while the stop rate declined to 15.85 per cent from 15.89 per cent at the preceding auction.
However, Nga noted that concentrating borrowing in longer-dated instruments could create refinancing pressure when substantial amounts mature around the same period.
Yusuf raised a separate concern about the allocation of financial resources, arguing that attractive returns on government securities could make them more appealing than lending to businesses, particularly in sectors such as manufacturing, agriculture and micro, small and medium-sized enterprises.
He cautioned that this preference could limit funds available for productive investment if it persisted, while noting that strong Treasury bill demand alone did not establish that business lending had declined as a direct result.
“The challenge for economic policy is not simply to attract investment into government securities but to improve the allocation of financial resources towards productive economic activities,” Yusuf said.
He added that relative stability in the foreign exchange market could improve the appeal of naira-denominated securities to foreign portfolio investors. However, the benefits would depend on exchange-rate movements and other investment costs, while foreign inflows could reverse as market conditions changed.
Both experts said future demand would depend on how investors assessed yields against the risks and alternatives available in the market. They advised investors to consider their cash-flow needs, investment objectives and risk tolerance before choosing between shorter- and longer-tenor Treasury bills.
THE ISSUES
The strong demand for one-year Treasury bills indicates that investors are willing to commit funds for longer periods at current yields. This may reflect expectations that interest rates could fall, but the trend does not establish that a decline is inevitable.
For investors, the choice between short- and long-tenor bills involves a trade-off. Longer maturities can reduce the need to reinvest frequently, but they may limit access to funds and expose investors to potential losses if they sell before maturity when market yields have risen. Shorter maturities offer earlier access to principal but expose investors to the risk of reinvesting at lower rates.
For the government, strong demand can support the financing of public expenditure. However, the broader implications depend on the cost of borrowing, the maturity structure of outstanding debt and the government’s ability to meet repayment obligations.
The implications for businesses are less straightforward. Attractive Treasury bill yields may influence how investors allocate their funds, but auction demand alone does not prove that banks or other lenders are reducing credit to the private sector. Assessing that concern would require evidence on lending volumes, interest rates and credit availability.
The policy challenge is therefore to maintain investor confidence in government securities while improving the conditions for businesses to access affordable financing and support productive economic activity.
WHAT’S BEING SAID
“The challenge for economic policy is not simply to attract investment into government securities but to improve the allocation of financial resources towards productive economic activities.” – Dr Muda Yusuf, Chief Executive Officer, Centre for the Promotion of Private Enterprise
WHAT’S NEXT
Demand for the 364-day Treasury bill will depend on how investors respond to future inflation figures, CBN policy decisions, government borrowing needs and changes in financial system liquidity.
If investors continue to expect lower yields, longer-tenor bills could remain attractive. If they anticipate higher rates, some may favour shorter maturities to retain the option of reinvesting sooner.
Investors will also need to assess whether the returns available compensate for inflation, liquidity constraints and the possibility of selling before maturity at an unfavourable price.
BOTTOM LINE
Investors are showing a strong preference for one-year Treasury bills, with subscriptions substantially exceeding government offers at the October auctions. Expectations of lower interest rates and the appeal of locking in current yields may help explain the trend, but future demand will depend on monetary conditions and market risks. The wider policy question is how to balance government financing needs with access to affordable credit for productive businesses.
