Tea Central Bank of NigeriaThe one-year Treasury bill rate for the month of November jumped to 14.84% from 12% in September 2022.
The jump followed the decision by the main bank to raise the benchmark interest rate to 16.65%, its highest level since 2001.
According to the auction result seen by Naijaonpoint, CBN initially intended to raise N139.89 billion for the one-year treasury, but recorded a total subscription of N345.23 billion, thus an oversubscription of N205 thousand. millions. But the main bank ended up allocating only N199.93 billion in Treasury bills.
TPM Raise Effect: Recall that during the 288th meeting of the MPC, the CBN raised the monetary policy rate for the fourth consecutive meeting to its highest level in two decades.
- Specifically, the CBN raised the MPR by 150 basis points to 16.5% on November 22, 2022, immediately triggering a rally in one-year Treasury bills.
- The aggressive stance is to fight Nigeria’s inflation rate, which accelerated to a 17-year high of 21.09% in October 2022.
- However, it is worth noting that despite the significant improvement in the Treasury bill rate, it produced a negative yield of 6.25%.
Auction highlights: The 91-day T-bill recorded a stop rate of 6.5% and attracted a total subscription of N11,968,000,000. The offer amount of N32.27 billion while the allocation is 11.67 thousand millions.
- Furthermore, the 182-day treasury recorded a total subscription of N3.04 billion in contrast to the offer amount of N41.25 billion. This represents a subscription rate of 8%, while the stop rate stood at 8.05%.
Why is it going up: Interest rates for fixed income instruments have increased since the CBN shifted to a more aggressive stance on monetary policy, with a greater involvement in long-term debt instruments.
- Specifically, the Debt Management Office (DMO) raised a sum of N269.15 billion through its November 2022 FGB Savings Bond issuance, representing an underwriting rate of 152.9%, having issued at marginal rates of 14.75%, 15.2% and 16.2% for the three issuance tranches.
- The CBN monetary policy committee further increased the benchmark interest rate to encourage Nigerians to save and invest in the local currency instead of foreign currency.
The final game: A rising yield on Treasury bills is meant to help soak up private sector liquidity in the central bank’s coffers. This is meant to lead to the following;
- Reduce the demand for foreign exchange in the hope that people would rather invest in high-interest, low-risk government investments than buy foreign currency.
- Reduce the amount of naira by chasing fewer goods in the hope that it will reduce inflation.
- It provides a source of financing for short-term government financing needs.
What it means to you: Nigerians with naira savings should consider buying Treasuries, especially the one-year rates, as these opportunities won’t last long.
- While hedging against the naira by holding dollar assets is still the best option, holding T-bills at 14% plus interest is a great return.
- It also means that companies looking to give investors returns of around 20-25% will now have to deal with risk-free Treasury bills. It probably makes more sense to buy 14% T-bills than to invest in a risky investment with a 20% return.
- Retail investors will have to look for higher returns from investments in time deposits. It is foolhardy to accept less than Treasury bills for time deposits.
- Eventually, interest rates on loans will rise further. The best bet is to find ways to pay off the loans early enough.
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