Liquidity Constraints Limit Demand for Nigerian Treasury Bills

Nigeria’s one-year treasury bills (T-bills) are witnessing decreased demand amidst rising yields and liquidity constraints. Despite CBN’s efforts, demand dropped to N861 billion, the lowest this year. Analysts attribute this to limited liquidity and investor caution relating to foreign exchange pressures. Although yields increased, indicating positive returns, overall T-bill sales remain subdued, at N4.7 trillion for 2024.

The demand for Nigeria’s one-year treasury bills (T-bills) has been diminishing, despite efforts from the Central Bank of Nigeria (CBN) to enhance yields in recent auctions. During an unexpected auction on Wednesday, the yield on these T-bills increased from 22.52 percent to 24.90 percent, the second consecutive rise attributed to ongoing liquidity constraints in the market. This increase has allowed for a positive real return of 1.72 percent, the first occurrence since May 2020.

Demand, however, significantly declined to N861 billion, standing as the lowest level recorded this year, down from N1.5 trillion in the first auction of 2024. This reduction occurred despite the largest offer since February 2024, amounting to N800 billion. Previously, demand had peaked with N3.2 trillion in bids against a supply of only N670 billion, highlighting the stark change in market conditions.

Tajudeen Ibrahim, head of research at Chapel Hill Denham, suggested that the decline in demand is primarily due to reduced system liquidity. He noted, “Domestic demand is largely dictated by system liquidity. On the international front, foreign portfolio investors (FPIs) primarily engage in OMO bills, making it a better gauge of their appetite.”

He observed that although the one-year bill now yields over 24 percent, offering positive real returns and a lucrative carry trade for FPIs, limited liquidity remains a major hindrance. The CBN’s sudden auction was also an attempt to address an N800 billion shortfall projected in its first-quarter T-bills calendar.

Matilda Adefalujo, a fixed-income trader, supported this view, emphasizing that the low liquidity is the key factor to the declining demand for T-bills. She explained that the additional auction aimed to signal the attractive nature of NT-bills due to strong yields and to enable borrowing ahead of a potential interest rate reduction.

Earlier in the year, foreign banks maintained optimism regarding Nigeria’s T-bills, as noted in J.P. Morgan’s report, “Emerging Market Frontier Local Markets Compass,” which stated a long-term position on Nigeria’s T-bills amid ongoing reforms. The naira had held steady around N1,500 in early 2024 but began to depreciate slightly due to market pressures, further correlating with the decrease in T-bill demand.

Investor caution has increased due to global tariff tensions, leading some to favor safer domestic assets. Reports indicate that FPIs have been withdrawing from the T-bills market. As an analyst from Capitalfield remarked, fluctuations in exchange rates resulted from FPIs exiting, prompting the CBN to augment OMO bill yields to discourage further capital outflow.

Furthermore, Kingskin Okojie, a treasury analyst at Access Bank, observed that the participation of FPIs in T-bills has waned, resulting in rising yields as the CBN strives to reacquire their interest. He indicated, “There’s a clear correlation between Treasury bill rate declines and FX market volatility.”

Despite the unexpected auction, the CBN sold only N436.72 billion worth of one-year T-bills and achieved total T-bill sales of N504 billion across all tenors. The total sales for 2024 thus far have reached N4.7 trillion, with limited interest shown in 182-day and 91-day T-bills. Of the N100 billion offered in 91-day bills, merely N27.19 billion was sold, while N40 billion was sold from the 182-day bill, yielding rates of 20.39 percent and 18.86 percent, respectively.

The liquidity constraints have significantly impacted the demand for Nigeria’s T-bills, as evidenced by a marked decrease in bids despite rising yields. The Central Bank’s attempts to stimulate the market through additional auctions have not yet successfully revived investor interest. Both domestic and foreign investors remain cautious, largely due to unresolved market volatility and broader economic conditions. Consequently, T-bill demand continues to reflect the complexities of the current financial landscape.

Original Source: businessday.ng