Tuesday, January 2, 2018 /6:34 PM / Meristem
Issue on Offer/Summary
The Central Bank of Nigeria (CBN) is scheduled to hold the first Treasury Bills (T-Bills) Primary Market Auction (PMA) for 2018 on the 3rd of January 2018. T-Bills worth NGN127.61bn will mature, while an amount of NGN148.86bn will be issued in 91-day, 182-day and 364-day instruments. The CBN is expected to auction NGN11.77bn, NGN33.93bn and NGN115.85bn in the 91-day, 182-day, and 364-day instruments respectively.
Outlook on Yields /Advised Stop Rates
On the back of the improved macroeconomic conditions, the year 2017 was characterised by strengthened investor confidence and participation in the fixed income market, as traders reacted positively to the policy actions targeted at improving FX conditions in the country.
Following the announcement to fully settle instruments maturing on the 14th and 21st of December 2017, yield declines were recorded on all tenors since the last T-Bills PMA on the 29th of November 2017. The 1M tenor ranked as the most attractive instrument recording a yield decline of 6.49%. The 6M, 3M, 9M and 12M instruments also recorded yield declines of 4.17%, 3.01%, 2.38% and 1.60% respectively. Consequently, the average T-bills yield settled at 14.06% on the 29th of December, 2017.
Given the improvements seen in the Nigerian economy in 2017, and the Monetary Policy Committee (MPC) intent to maintain FX stability and support economic growth, we expect a rate cut in the first quarter of 2018. Also, we expect Eurobond auctions in the year, as the government continues its plan to convert short term domestic debt into long term foreign loans. Consequently, we expect investors to price this vis a vis the expected borrowing in the 2018 budget. As a result, we expect yields to moderate in 2018.
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:
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”.