Despite the Central Bank of Nigeria’s (CBN) efforts to improve yields in the last two auctions, demand for Nigeria’s one-year treasury notes, or T-bills, has steadily declined.
The CBN unexpectedly added a second auction event on Wednesday to its calendar. As the market continued to be impacted by liquidity limitations, rates on one-year T-bills increased for the second straight time at this surprise auction, rising from 22.52 percent to 24.90 percent.
For the first time since May 2020, this increase has produced a positive real return of 1.72%.Â
However, compared to N1.5 trillion at the first auction of 2024, demand for the one-year bill fell sharply to N861 billion on Wednesday, its lowest level this year. This is although, at N800 billion, the offer is the biggest since February 2024.
At its height, bids totaling N3.2 trillion were placed for Nigeria’s T-bills, but the supply was just N670 billion.
Crunch in liquidity
Chapel Hill Denham’s head of research, Tajudeen Ibrahim, blamed the decline in demand on insufficient system liquidity.
System liquidity plays a major role in determining domestic demand. He clarified that OMO bills are a stronger indicator of foreign portfolio investors’ (FPIs’) demand because they are the primary instrument they use on the global stage.
Since most global banks continue to maintain their benchmark interest rates, Tajudeen said, “the one-year bill yielding over 24 percent now offers positive real returns and a lucrative carry trade for FPIs.”
He further mentioned that the auction was held on Wednesday to make up for the N800 billion that was missing from the CBN’s first-quarter T-bills calendar.
Fixed-income dealer Matilda Adefalujo expressed similar opinions, identifying limited liquidity as the primary cause of declining demand.
“The additional auction was introduced to address a number of concerns, including frontloading borrowing ahead of a potential rate cut in May and signalling that NT-bills remain attractive with strong yields,” she said.
The volatility of the naira and foreign investors
Foreign banks have previously stated that they were positive on Nigeria’s T-bills earlier in the year.
In its research, ‘Emerging Market Frontier Local Markets Compass,’ J.P. Morgan wrote that “we remain long on Nigeria’s T-bills as reform momentum begins to deliver rewards. However, this trade is really about taking a naira position.”
The naira remained constant around N1,500 for the first two months of 2024, making it one of the best-performing frontier market currencies. However, it has been under pressure in the foreign currency (FX) market since early March; as of Wednesday, it had dropped from N1,502 to N1,580. T-bill demand has been declining at the same time as this depreciation era.
Global tariff tensions have also exacerbated investor concern, as many have shifted their focus to safer domestic assets.
FPIs have been leaving the T-bills market, according to several analysts.
Despite the surprise auction, the CBN only sold N436.72 billion worth of one-year T-bills and N504 billion worth of all tenors on Wednesday. This raises 2024’s total T-bill sales to N4.7 trillion.
There was little interest in the 182-day and 91-day T-bills. Only N27.19 billion of the N100 billion issued in 91-day bills were sold, compared to N40 billion for the 182-day bill. The 182-day bill yield increased to 20.39 percent, while the 91-day bill yield increased to 18.86 percent.
