Treasury Bill Yields Fall As Investors Rejuggle Portfolios

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Thursday, February 13, 2020   /  04.30PM / Adesola Borokinni and Adaeze Nwachukwu, Proshare research, Header Image Credit: Missybanker


Investors began reconsidering portfolio composition towards the end of 2019 as monetary policy changes caused Treasury Bill (T-bill) rates to slide. The treasury bills market went bearish from the beginning of Q4 2019 as treasury stop rates dipped (see chart 1 below). The yields on the treasury bills went from double-digit at the beginning of Q1 2019 to single-digits towards the end of the year. Does this mean that investors need to bail out of the fixed income market? Not necessarily.


A likely rise in the 2020 budget deficit as a result of falling international oil prices will likely lead to the sale of more treasuries towards the beginning of Q2 2020, and see yields rise. The January treasury rates 2020 seem to represent a bottoming out of the market with a likely yield rebound.

 

Chart 1: Treasury Bill Yields (%)

Proshare Nigeria Pvt. Ltd.

Source: DMO, Proshare research

 

T-bill Roller Coaster Dip

T-bill yields went on a roller coaster drop after Q3 2019 when the Central Bank of Nigeria (CBN) stopped local individual investors from buying federal instruments at the Open Market Operations (OMO) of the bank. The restriction pulled funds from OMO and channelled them to T-bills dragging down T-bill yields as the price of bills went up. The highest yield of 11.42% on the 91-day tenor bill was recorded in August and September of 2019 while the lowest yield of 3.53% was in January 2020. Likewise, the 182-day tenor bill recorded its highest yield of 14.47% in January 2019 while the lowest yield of 4.60% was in January 2020. In the same vein, the 364-day tenor bill recorded its highest yield of 17.64% in January 2019 while its lowest yield of 5.81% was in December 2019. The outlook for T-bills appears bearish as yields tilt downwards (see chart above).


The major dip in the yields of treasuries started in October 2019. In its bid to drive investments away from risk-free instruments to the real sector, the CBN announced the exclusion of non-bank locals (individuals and corporates) from participation in its Open Market Operation (OMO) at both the primary and secondary market. The exclusion of non-bank locals from participation in the OMO led to an increase in the demand for treasury bills. The surge in demand for treasuries led to an increase in the prices and this in turn drove yields downwards.


Table 1: Quarterly representation of 91-day tenor treasury bills 2019

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Source: CBN, Proshare research,

Note: Data used in the different quarters represent figures of the months and not an average of the quarterly performance.


In Q1 2019, the 91-day tenor bill recorded an excess subscription of N4.85bn of the N3bn which was offered by the federal government of Nigeria (see Table 1). There was a decrease in the excess subscription in Q2 2019 from N4.85bn to N270mn, this was attributed to the decrease in the range of bids rate of the 91-day tenor bill to +9.6%-13.0% from +10.3% -14% in Q1 2019.


In Q3 2019, there was an increase in the excess subscription to N1.46bn from N270mn as a result of an increase in the range bids from +9.6%-13.0% to +10.4% -17%. Despite the decline in the amount offered to N2bn from N3bn in the previous quarter and decline in the range of bids rates of the Q4 2019 91-day tenor bill to +3%-6.3% there was a significant increase in the excess subscription of N22.72bn as against the N2bn amount offered in Q4 of the year. The reason for the sudden surge in excess subscriptions in Q4 2019 was the loss of confidence in the Nigerian equity market.


Table 2: Quarterly Representation of 182-day Tenor Treasury bills 2019

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Source: CBN, Proshare research

Note: Data used in the different quarters represent figures of the months and not an average of the quarterly performance.

 

In Q1 2019, the 182-day tenor bill recorded an excess subscription of N21.69bn of the N8.39bn which was offered by the federal government of Nigeria (see Table 2). There was a decline in the excess subscription in Q2 2019 from N21.69bn to N8.53bn, this was the result of a small decline in the range bids of the 182-day tenor bill to +11.3%-12.5% from +11.5%-13.5% in Q1 2019.


In the third quarter, there was a decline in the excess subscription to N3.98bn from N8.53bn. The decline in the excess subscription was the result of the increase in the 91-day tenor bill and OMO instrument subscription rate.


In Q4 2019, the 182-day bill recorded a significant increase in the excess subscription to N16.68bn from N3.98bn despite the decline in its amount offered to N2bn from N8.39bn in the previous quarter and a decline in the range of bids rate to +4.2%-6.0% from +11.3%-12.98% in 3rd quarter of 2019. The sudden surge in the excess subscription in the 4th quarter for the 182-day bill was similar to the surge recorded for the 91-day tenor bill i.e. investors preferred a risk-free instrument such as treasury bill despite its low range bids rate as against other investments such as equities and commodities market.

 

Table 3: Quarterly representation of 364-day tenor treasury bills 2019

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Source: CBN, Proshare research

Note: Data used in the different quarters represent figures of the months and not an average of the quarterly performance


In Q4 2019, the 364-day tenor bill recorded an excess subscription of N183.44bn of the N37.18bn which was offered by the Federal Government of Nigeria (see Table 3). There was a decline in the excess subscription in the 2nd quarter of the year from N183.44bn to N106.58bn, this could be attributed to the decline in the range bids of the 364-day tenor bill to +11.75%-12.7% from +11.59%-14.5% in the 1st quarter of the year.


In Q3 2020, there was a significant increase in the excess subscription to N191.6bn from N106.58bn. The significant rise in the excess subscription is associated with the rise in the range of bids rate from +11.75%-12.7% to +12.95%-14.8% in the quarter.


In Q4 2020, there was a significant decline in the excess subscription to N53.61bn from N191.6bn while the range of bids declined to +5.0%-13.3% from +12.95%-14.8% in the previous quarter. There was also a drastic drop in the amount offered from N168.36bn in the previous quarter to N3bn in Q4 2019 (see Table 3) which could also account for the possible fall in the excess subscription in the 4th quarter of the year. 

 

The Macroeconomics of T-bill Rates

 

Inflation concerns in 2020 will compel the CBN to push coupons on T-bills up between Q1 and Q2 2020, this would likely lead to higher yields and a larger flow of investible funds back into the T-bill market. 

 

Chart 2: Nigeria's Monthly Inflation rate of 2019

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Source: NBS, Proshare research


Nigeria's inflation rate was consistently on the rise since the implementation of the temporary closure of its border in August 2019. The inflation rate rose from 11.02% in August 2019 to 11.98% in December 2019 (see chart 2).


Despite the consistent rise in the rate of inflation since the closure of Nigeria's land borders with neighbouring countries in August 2019, treasury bills have been issued by the Federal Government at lower coupons. The lower yields on treasury instruments were to prevent the crowding out of the private sector from the domestic credit market and improve domestic liquidity. The government therefore shifted focus away from using T-bills as its primary instrument for containing inflation to selling treasury instruments to foreign portfolio investors (FPI) and winding down domestic debt thereby winding down domestic deficit financing, reflected in the fall in the number of treasury bills offered in December 2019 with a corresponding fall in the yields on the bills (see chart 1).

 

Chart 2: Nigeria's oil prices per barrel ($) 2019

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Source: Oilprice.com, Proshare research


Nigeria's oil prices in 2019 fluctuated between $52.59 and $74.04 per barrel (see chart 2). Nigeria's oil prices were relatively stable in 2019 compared to previous years. The relative stability of international oil prices indicates the possibility of the Nigerian government experiencing a more stable fiscal balance. Nigeria's bigger budget deficit has been the outcome of a fall in international oil prices, with downward trending relative stability of oil prices in 2019 analysts believe that Nigeria's budget deficit will rise to -2.1% of the country's GDP in 2020 (see chart 3) thereby putting added pressure on the government to raise funds through the sale of treasury bill instruments.


Chart 3: Nigeria's Budget Deficit (%) 2010-2019

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Source: CBN, Proshare Research. e = estimate, f = forecast

NOTE: The figure for 2019 is an estimate, the 2020 budget deficit figure represents Proshare’s interim research forecast

 

Dodging Monetary Policy Bullets

The federal government in 2019, outlined a commitment to encouraging growth and an improved flow of liquidity to the real sector of the economy. Towards the end of 2019, the CBN re-emphasized its commitment to the flow of investment to the private sector by mandating deposit money banks (DMBs) to increase their loan-to-deposit ratio from 60% to 65%.


In 2019, there was relative stability in oil prices as prices fluctuated between $52.59 and $74.04 per barrel (see chart 2), therefore there were expectations of a reduction in the government budget deficit and less pressure on the federal government to raise funds through T-bills since the economy rested on oil exports with relatively stable prices.


Despite a rise in the inflation rate from 11.02% in August to 11.98% as of December 2019, the federal government restated its commitment to driving liquidity in the economy by reducing the number of treasury bills offered and shifting focus to alternative instruments to tackle inflation.


The yield curve on T-bills for different tenors slid downwards between Q3 and Q4 2019. Yields on bills tumbled as coupons stayed low and bond prices skipped upwards creating negative inflation-adjusted yields. Despite low yields with a reduction in the number of bills on offer, analysts observed that there was a consistent rise in excess bill subscription which could have been caused by the redirection of investor's funds from equities and equity-based mutual funds to T-bills because of their lower risks.  


Going into the year 2020 investors may still see rich pickings from the treasury market as the government struggles to cover its fiscal imbalances. Nevertheless, the equity market will also, if carefully navigated, throw up some hidden-value opportunities. 


Proshare Nigeria Pvt. Ltd.


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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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