Liquidity Squeeze Affects Demand for Nigerian Treasury Bills
The demand for Nigeria’s one-year T-bills has decreased despite efforts by the Central Bank to raise yields. The recent auction yielded 24.90 percent returns but recorded only N861 billion in demand, attributed to liquidity challenges. Analysts express concern over foreign investor participation amid naira volatility, impacting market dynamics.
The demand for Nigeria’s one-year treasury bills (T-bills) has diminished steadily, despite the Central Bank of Nigeria’s (CBN) attempts to enhance yields in recent auctions. Following an unexpected adjustment in the auction schedule, yields on these T-bills increased to 24.90 percent, up from 22.52 percent. This marked the second consecutive rise, attributed to ongoing liquidity constraints that are affecting the market.
In a surprising auction held on Wednesday, demand for the one-year T-bill fell to N861 billion, marking its lowest level this year, in stark contrast to N1.5 trillion at the year’s first auction. This decline occurred despite offering the largest supply of T-bills since February 2024, totaling N800 billion. Previously, the T-bills market experienced incredibly high demand, reaching N3.2 trillion against a supply of only N670 billion.
Liquidity challenges have been cited as a significant factor for this reduced demand. Tajudeen Ibrahim, the head of research at Chapel Hill Denham, indicated that domestic demand fluctuates largely based on the liquidity within the system. Furthermore, foreign portfolio investors (FPIs) typically favor open market operations (OMO) bills, which provide better insights into their investment appetite.
Tajudeen noted that even with positive real returns offered by the one-year bills, the liquidity issues overshadow demand. Additionally, the CBN apparently introduced the surprise auction to alleviate a shortfall of N800 billion in its first-quarter T-bill sales plan.
Matilda Adefalujo, a seasoned fixed-income trader, highlighted that low liquidity remains a primary barrier to demand. She stated that the auction aimed to reinforce the attractiveness of T-bills through strong yields and to frontload borrowing in anticipation of a potential interest rate decrease in May.
Earlier this year, foreign banks expressed optimism regarding Nigerian T-bills, as indicated by J.P. Morgan’s report, which emphasized a bullish stance driven by reform progress. However, the naira’s recent depreciation has impacted T-bill interest. Starting 2024 robustly, the naira has slipped from N1,502 to N1,580 amidst FX market pressures, correlating directly with declining T-bill demand.
In response to fluctuating exchange rates, analysts noted that FPIs are withdrawing funds from the T-bill market, prompting the CBN to increase OMO bill yields to deter capital flight. Kingskin Okojie, a treasury analyst at Access Bank, indicated that the decrease in FPI participation leads to rising yields as the CBN seeks to attract reinvestment.
Despite the CBN’s efforts through surprise auctions, only N436.72 billion in one-year T-bills was sold, totaling N504 billion across all maturities on the auction day. T-bills with 182-day and 91-day terms saw limited sales as well, with respective yields increasing to 20.39 percent and 18.86 percent, reflecting ongoing investor caution amidst current market conditions.
In summary, the market for Nigeria’s one-year treasury bills is facing a significant reduction in demand due to liquidity constraints, despite recent yield hikes. This scenario reflects broader apprehensions among foreign investors linked to the volatility of the naira and overall market conditions. The CBN’s recent auction initiatives represent attempts to stabilize the demand, yet the outcomes point to continued challenges as investors remain cautious amid shifting monetary dynamics.
Original Source: businessday.ng
