February 09, 2018 /3:15 PM / 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 14th of February 2018. T-Bills worth NGN176.00bn will mature, while an equal amount is expected to be issued in 91-day, 182-day and 364-day instruments. The CBN is expected to auction NGN6.00bn, NGN30.00bn and NGN140.00bn in the 91-day, 182-day, and 364-day instruments respectively.
Outlook on Yields /Advised Stop Rates
Although yields have been on the decline since the start of the year, they have remained attractive for risk averse investors. Also, investors have continued to favour longer tenor instruments. Subsequently, the last primary market auction recorded respective bid to cover ratios of 1.07x, 1.01x and 1.57x on the 91-day, 182-day and 364-day instruments.
The treasury bills market has been predominantly bearish since the last primary market auction on the 31st of January 2018. The average T-Bills yield has advanced by 1.00%, following yield increases on all tenors. Amidst prevalent selling pressures in the secondary market, yield on the longer tenor, 12M, advanced the least (+0.25%) in the period. In contrast, the 1M instrument was the least favoured by investors as the yield on the instrument advanced by 1.46%.
Since the last auction, system liquidity has improved, on the back of constant OMO interventions by the CBN, as the market received a net repayment of NGN373.68bn in the period.
This week, the DMO appointed a consortium of banks to handle the planned Eurobond issuance, signalling strong commitment towards the sale of its USD2.50bn Eurobond. The estimated proceeds of NGN762.5bn will be used to redeem Nigerian Treasury Bills. The settlement of the maturing treasury bills is expected to pressure rates further, as we saw after the settlement of NGN198.03bn worth of T-Bills in 2017. The expectation of the decline in yields, coupled with the possibility of a cut in the monetary policy rates should improve participation in this auction as investors try to take advantage of the current high yield environment.
Investing through Meristem Wealth Management Limited
Meristem Wealth Management Limited charges a transaction fee of 0.25% of the principal amount invested, and there will be three (3) days prior notification before maturity for all Treasury Bills investments. The income from investing in T-Bills is tax-free, so interest received is not subject to withholding tax and you will receive an immediate Investment confirmation letter for the Treasury bills. Also, note that the T-Bills certificates can be used as collateral for securing loans.
The T-bills Primary Auction bid holds twice in a month (i.e. every other Wednesday). The above likely stop rates are our estimates and might not necessarily hold true, as the final decision always lies with the CBN based on the auction process.
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”.
1. Bearish Flattening on Bonds, despite continued offshore sell on the 10-yr
2. CBN releases No-Sale OMO Result, as Finance Minister Announces Prospective $2.5bn Eurobond Issuance
3. FGN Savings Bond February 2018 Offer
4. Funding Pressures Push Lending Rates above 30%, amid Continued Sell off on Bonds
5. Bond Yields Rise on Weak Local Demand and Slight Offshore Sell
6. DMO issues 2 and 3 year Savings Bonds at 10.277% and 11.277% respectively
7. Nigeria’s Re-Inclusion to the JP Morgan Index, How Feasible?
8. CBN sells N215bn OMO T-bills to Mop up Excess Liquidity Inflows
9. CBN sells N253bn T-bills at c.10bps lower than previous Auction Rate
10. FGN Domestic Debt Service Payment Increased In Line With The Stock of Domestic Debt
11. Naira Depreciates slightly despite $210m FX intervention by the CBN
12. Decent Start to the Year for the DMO
13. Proposed USD2.5billion Eurobond Issuance in Q1 2018