The Central Bank of Nigeria (CBN) has reported a noticeable increase in investor demand for longer-tenured government securities.
In the CBN’s second-quarter 2024 economic report, the apex bank noted a strong preference among investors for longer-dated securities over shorter-term options as a means to hedge against the ongoing surge in inflation.
The report read: “There was a preference for longer-tenured government securities, reflecting investors’ precautionary motive against rising inflation.”
NTB subscriptions drop to N6.98 trillion in Q2 2024
- During the quarter, the total amount offered, subscribed and allotted for Nigerian Treasury Bills (NTBs) across 91-day, 182-day, and 364-day maturities all dropped to N1.47 trillion, N6.98 trillion, and N2.81 trillion, respectively.
- This was a reduction from the prior quarter’s totals, which stood at N2.21 trillion in amount offered, N12.22 trillion in subscriptions, and N5.55 trillion in amount allotted across these maturities.
- Despite the reduced volume, stop rates, essentially the minimum accepted yield in treasury auctions, increased significantly across all tenors, with the average rate reaching 18.47%, up from 11.97% in the first quarter.
- This rise in rates highlights an attempt by the CBN to make short-term securities more appealing to investors amidst a market favouring longer-term placements.
The report read, “Total NTBs offered, subscribed, and allotted across tenors (91-, 182- and 364-day) amounted to N1.47 trillion, N6.98 trillion and N2.81 trillion, respectively, compared with N2.21 trillion, N12.22 trillion, and N5.55 trillion, in the preceding quarter.
“The lower amounts offered and subscribed were accompanied by increased stop rates on all the maturities to 18.47(±2.23) per cent, from 11.97(±9.23) per cent in the preceding quarter.”
Bond subscriptions drop to N1.78 trillion
In the realm of Federal Government Bonds (FGN Bonds), the CBN’s report noted continued investor interest.
The government offered N1.35 trillion in bonds, and investors’ subscriptions exceeded this amount, reaching N1.78 trillion. Ultimately, N1.30 trillion was allotted, reflecting strong demand despite a reduction in the offer size from the first quarter’s N3.31 trillion.
Marginal rates for FGN Bonds were also adjusted upward, rising to 20.37% from 17.73% in the previous quarter. The adjustment in yields highlights an ongoing effort to attract investors who are looking to secure returns that can outpace inflation.
The report read: “FGN Bonds of various tranches were offered during the quarter under review. The amount offered, subscribed, and allotted were N1.35 trillion, N1.78 trillion, and N1.30 trillion, respectively, relative to N3.31 trillion, N2.39 trillion, and N1.16 trillion in Q12024.
“The marginal rates at 20.37(±1.13) per cent, were higher than 17.73(±2.73) per cent in the preceding quarter, and the bid rates were 19.00(±5.00) per cent, against 20.50(±9.50) per cent in the previous quarter.”
Increase in OMO participation
- The report also highlighted developments in the CBN’s Open Market Operations (OMO), a primary tool for managing liquidity in the financial system.
- OMO auctions saw a marked increase in participation, with total offerings and allotments expanding to N2.70 trillion and N4.36 trillion, respectively.
- This marked a significant increase from the previous quarter’s offerings of N1.45 trillion and allotments of N1.97 trillion.
The report read: “Analysis of the open market operations showed that the total amount offered, subscribed, and allotted increased to N2.70 trillion, N4.94 trillion, and N4.36 trillion, respectively, from N1.45 trillion, N2.61 trillion, and N1.97 trillion in the preceding quarter. The increase in subscription was driven by the higher stop rates of 20.62(±1.88) per cent, from 15.75(±5.75) per cent.”
What you should know
- The shift in investor preferences aligns with the CBN’s broader monetary policy strategy, which has leaned toward higher interest rates to contain inflationary pressures.
- By maintaining elevated yields on long-term government securities, the CBN appears to be steering investors toward instruments that offer a more predictable return.
- The bank’s policy stance has been largely influenced by inflation, which reached 34.19% in the second quarter, up from 33.20% in the previous quarter. Core inflation—a measure that excludes volatile items such as food and energy—also rose to 27.40%, compared to 25.90% in the first quarter, driven by high manufacturing costs and the rising price of imported goods.
- In this context, the demand for government securities not only provides investors with a buffer against inflation but also serves as a stabilizing factor for Nigeria’s financial market. The central bank’s efforts to moderate liquidity, coupled with increased investor participation in both NTBs and FGN Bonds, are expected to play a key role in bolstering financial stability and investor confidence.