Financial experts say investors’ strong preference for one-year Treasury bills reflects expectations of interest rate changes and a desire to lock in current returns for longer.
Two investment experts, Chukwudi Nga, Managing Director and Chief Executive Officer of MorganCapital Securities Ltd and
Dr Muda Yusuf, Chief Executive Officer of the Centre for the Promotion of Private Enterprise, made the assertion in an interview with the News Agency of Nigeria (NAN) on Sunday in Lagos.
They said that investors might be seeking to lock in available returns for a longer period rather than risk reinvesting in shorter-term bills at potentially lower rates.
NAN recalls that at the Oct. 7 auction, the 364-day Treasury bill attracted subscriptions of about N1.683 trillion against an offer of N700 billion.
In contrast, the 91-day and 182-day bills attracted subscriptions of N39.42 billion and N46.87 billion, respectively, against offers of N100 billion each.
The trend persisted at the Oct. 14 auction, when the 364-day bill attracted about N982 billion in subscriptions against an offer of N350 billion.
Its stop rate, however, edged up to 15.90 per cent from 15.85 per cent at the previous auction, while rates on the 91-day and 182-day bills remained at 15.50 per cent and 15.80 per cent, respectively.
The investment experts attributed the preference partly to investors’ expectations about the future direction of interest rates.
Nga said the difference between the 182-day and 364-day stop rates at the Oct. 7 auction was only five basis points, suggesting that the preference for the longer tenor was not necessarily driven by a substantially higher return.
According to him, investors may be willing to commit their funds for longer because they expect yields to decline, although the direction of future rates will depend on inflation, monetary policy, liquidity and other market conditions.
Similarly, Yusuf told NAN that expectations of further monetary easing, attractive yields and the relative safety of government securities were encouraging investors to favour the one-year instrument.
NAN reports that the Central Bank of Nigeria (CBN), at its September Monetary Policy Committee meeting, reduced the Monetary Policy Rate from 26.5 per cent to 23 per cent.
Although the decision does not guarantee further reductions, the adjustment has added to market discussion about the future direction of interest rates and encouraged some investors to consider securing current returns before yields fall.
Nigeria’s headline inflation rate also eased to 14.63 per cent in September from 15.39 per cent in August, according to the National Bureau of Statistics.
However, future Treasury-bill yields will depend not only on inflation but also on the CBN’s policy decisions, government borrowing requirements and the amount of liquidity available in the financial system.
Nga said the 364-day bill could provide greater certainty about nominal returns for investors able to hold the instrument until maturity.
By contrast, investors who repeatedly buy shorter-tenor bills face reinvestment risk if rates decline before their next investment.
He cautioned, however, that the one-year bill might not be suitable for investors who need access to their funds before maturity.
He said such investors could sell in the secondary market, where the price received would depend on prevailing market conditions. If market yields rose, they could incur a loss on the sale.
Inflation also remains a consideration because a positive nominal return does not necessarily translate into an equally strong gain in purchasing power.
Beyond investors’ returns, the concentration of demand in the one-year bill has implications for government borrowing and the wider economy.
Nga said strong demand could help the government raise substantial funds without necessarily increasing borrowing costs.
At the Oct. 7 auction, the government allotted N885 billion in 364-day bills against the initial offer of N700 billion, while the stop rate declined to 15.85 per cent from 15.89 per cent at the preceding auction.
He, however, noted that concentrating borrowing in longer-dated instruments could create refinancing pressure when substantial amounts mature around the same period.
Yusuf also added that the attraction of government securities also raised concerns about the allocation of financial resources, particularly where businesses struggle to obtain affordable credit.
He explained that high returns on government instruments could make them more attractive to investors than lending to businesses, especially in sectors such as manufacturing, agriculture and micro, small and medium-sized enterprises, where operating costs and business risks could be substantial.
He said such a preference could limit the funds available for productive investment if it persisted, “although strong demand for Treasury bills alone does not establish that lending to businesses has declined as a direct result.”
Yusuf said the policy challenge was to ensure that financial resources supported economic activity beyond government financing.
“The challenge for economic policy is not simply to attract investment into government securities but to improve the allocation of financial resources towards productive economic activities,” he said.
He added that relative stability in the foreign exchange market could also improve the attractiveness of naira-denominated securities to foreign portfolio investors.
However, the benefits would depend on exchange-rate movements and other investment costs, while foreign inflows could reverse when market conditions changed.
Looking ahead, Nga said demand for the 364-day bill could remain strong in the near term if investors continued to expect lower yields.
He cautioned that the trend was not guaranteed, noting that investors might prefer shorter tenors if they anticipated rising rates and wanted to reinvest their funds sooner.
Yusuf also said the pattern could change as monetary conditions evolved, with inflation risks, government borrowing and foreign exchange developments influencing investment decisions.
The experts advised investors to consider their cash-flow needs, investment objectives and tolerance for risk before choosing between short- and long-term Treasury bills.They said the outlook for demand would ultimately depend on whether investors continued to regard current yields as attractive relative to the risks and alternatives available in the market.
