The Central Bank of Nigeria's decision to cut its benchmark interest rate by 350 basis points has led to a significant decline in Treasury bill yields. At Wednesday's auction, yields fell across all three tenors as investors placed N4.09 trillion in bids for the 364-day bill. This sharp repricing in the Treasury bills market comes after the Monetary Policy Committee reduced the Monetary Policy Rate from 26.5 percent to 23 percent.
The 364-day Treasury bill cleared at a 15.89 percent stop rate, down from 16.62 percent at the previous auction. Despite demand exceeding the N400 billion offered by more than 10 times, the Central Bank allotted N447.07 billion at a 15.89 percent stop rate, translating to a true yield of 18.89 percent. This significant drop in yields surprised investors, who had anticipated lower yields but not to this extent.
According to Adeniyi Adejumobi, assistant fixed-income fund manager at FCMB, the 350 basis points MPR cut triggered further repricing in the market. He noted that money-market rates had already declined from about 20 percent to between 17 and 18 percent, creating room for Treasury bill yields to adjust further. Adejumobi emphasized that demand and liquidity would remain crucial in determining how quickly Treasury bill rates adjust.
The auction results showed that investor appetite for longer-dated Treasury bills remains strong. The 91-day bill recorded N54.93 billion in subscriptions against N100 billion offered, with N11.03 billion allotted at a 15.50 percent stop rate and a 16.14 percent true yield. For the 182-day tenor, subscriptions stood at N82.23 billion against N100 billion offered, with the Central Bank allotting N39.49 billion at a 15.80 percent stop rate.
Victor Ogunfijo, head of fixed-income trading at CardinalStone, believes that the rate cut signals the beginning of an easing cycle and is expected to push fixed-income yields lower. He stated that yields on fixed income instruments will react ahead, moving lower in response to this 350 basis points cut. This view is shared by analysts, who expect the combination of the MPR cut and liquidity to support lower clearing yields.
The strong demand at Wednesday's auction came against elevated system liquidity, which stood at N6.90 trillion as of September 21. This high liquidity level, coupled with the MPR cut, contributed to the lower clearing yields. However, Adejumobi cautioned that the MPR cut alone would not determine the level at which bills trade, and demand and liquidity would remain important factors.
The latest auction provides an early indication of how the CBN's new 23 percent policy rate is filtering into government short-term borrowing costs. For investors, however, the lower stop rates also mean that returns available on newly issued Treasury bills are beginning to moderate. This development is expected to have implications for businesses and investors, as evolving market conditions influence investment decisions.
Key points
- The Central Bank of Nigeria's 350 basis points interest rate cut has led to a sharp decline in Treasury bill yields.
- Investor appetite for longer-dated Treasury bills remains strong, with N4.09 trillion in bids for the 364-day bill.
- The rate cut is expected to signal the beginning of an easing cycle, pushing fixed-income yields lower.
