Ahead of Next T-bills Auction Scheduled 21st March, 2018

Wednesday, March 21, 2018 /11:50 AM /Meristem 

Issue on Offer/Summary
The Central Bank of Nigeria (CBN) is scheduled to hold a Treasury Bills (T-Bills) Primary Market Auction (PMA) on the 21st of March 2018. T-Bills worth NGN107.91bn will mature, while an amount of NGN53.96bn is expected to be issued in 91-day, 182-day and 364-day instruments. The CBN is expected to auction NGN5.40bn, NGN26.98bn and NGN21.58bn in the 91-day, 182-day, and 364-day instruments respectively. 

Outlook on Yields /Advised Stop Rates
Although yields have been on a downward trajectory, investors have remained bullish in the treasury bills space. Investor appetite remained strong as indicated by the bid-to cover ratio from the last auction. Although all tenors recorded oversubscription, we note that the 182-Day instrument was investor’s favourite, with a bid to cover ratio of 3.13x, followed by the 364-Day instrument the 91-Day instrument with respective bid-to-cover ratios of 1.81x and 1.00x. 

The secondary market for T-bills has been branded with mixed sentiments since the last auction. Selloffs were noted on the 3M, 6M and 12M tenors, as the yields on these tenors rose by 0.07%, 0.17% and 0.06% respectively. However, buying pressure prevailed on the 1M and 9M tenors as they recorded respective yield declines of 0.19% and 0.13%.

System liquidity has remained strained since the last primary market auction as the CBN has continued mopping up liquidity. Net OMO repayment has amounted to NGN270.77bn on the back of continuous interventions by the apex authority. 

The first MPC meeting of the year is scheduled to hold on the 3rd and 4th of April 2018, as the senate has begun the screening of the nominated members to the MPC. We stand by our expectation that the committee will hold rates at this meeting, while a contrary decision will be taken towards the end of H1:2018. 

The drive to shift Nigeria’s debt composition to accommodate less short-term domestic debt has seen the CBN place smaller amounts on offer at primary market auctions. The current amount on offer (NGN53.95bn) is 43.63% lower than the amount raised at the previous auction (NGN95.72bn). We expect the reduction in amount on offer to temper yields going forward, as the government seeks relatively cheaper sources of borrowing. 

Consequently, we advise rates with the dual purpose of achieving the best possible yields, as well as ensuring the success of the bid. The advised stop rates for the respective instruments are listed below: 

91-Day NGN5.40bn 11.70% - 11.90% 

182-Day NGN26.98bn 12.80% - 13.00% 

364-Day NGN21.58bn 12.90% - 13.10% 



About Treasury Bills
Treasury Bills (T-bills) are marketable money market securities that serve the purpose of raising money for the government and also help in monetary policy management of the Central Bank. T-bills are short-term securities that mature in 1 year or less from their issue date. They are usually issued with 3-month, 6-month, and 1-year maturities. 

How is Return Determined?
T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity. 

The advised stop rate is different from the annualized yield of instruments. For example; the annualized yield of a 91-day T-bill, with a stop rate of 15.30% is 15.90%. If you buy a 91-day T-bill with a face value and stop rate of N1, 000,000 and 15.3% accordingly, the discounted value would be N962, 274. The difference between the face value and purchase price, which is N37, 726, is the money return and it implies 15.9% yield on annual basis. However, the holding period yield for this instrument is 3.75% since it is held for a 91-day period (3 months), and not a year. 

How does the Auction Process work?
Treasury bills (as well as notes and bonds) are issued through a competitive bidding process at auctions. 

Primary market trading of Treasury bill instruments entails auctions by the country’s monetary authority – The Central Bank of Nigeria. T-bills are auctioned at established rates which determine the return to investors. Purchasing these instruments in the primary market and holding it until maturity would mean that the investor gets a fixed interest payment. 

Benefits of T-bills
The biggest reasons that T-Bills are so popular are that they are one of the few money market instruments that are affordable to the individual investors. Other positives are that T-bills (and all Treasuries) are considered to be risk-free investments because the Federal Government backs them. Also, T-bills are tax-free, unlike equities. 

The only downside to T-bills is that investors will not get a great (alpha) return because Treasuries are considered “exceptionally safe”. 

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