.Written by SpringNewsNG

A surge in market liquidity and a decline in inflation rates have driven Nigerian Treasury Bill (T-Bill) yields sharply lower, with the Debt Management Office (DMO) witnessing the one-year yield drop to 21.68% at Wednesday’s auction.

At the auction, the yield on the one-year bill fell to 21.68% from 22.59%, as excess liquidity swamped the market. The stop rates on the one-year and 182-day T-bills are converging, recorded at 17.82% and 17.75%, respectively. Consequently, the real return on the one-year T-bill remains positive at 2.8%.

This decline in yield is attributed to rates adjusting to the rebased inflation figure of 24.48%, down from 34.8%, alongside expectations of further moderation. This has fueled strong buying interest from investors. The current yield represents the lowest level since the Monetary Policy Committee (MPC) adopted a hawkish stance, resulting in an 850 basis point interest rate hike.

Analysts Weigh In

Matilda Adefalujo, a fixed-income analyst at Meristem, had earlier projected that stop rates for the offered instruments would likely decline.

“We anticipate further rate declines, driven by improved system liquidity, which stood at N582.95 billion as of Monday. Additionally, maturing obligations worth N1.30 trillion—twice the amount being offered—make investors net liquidity receivers,” she explained.

Adefalujo also noted a lower supply of Treasury bills at N650 billion, compared to N700 billion in the prior auction. Given these conditions, she suggested that the Central Bank of Nigeria (CBN) might leverage the opportunity to further ease borrowing costs by lowering stop rates across all tenors. An estimated liquidity injection of N4.5 trillion is expected in March.

Impact on the Economy

While the declining yield environment benefits the government’s domestic debt servicing, concerns persist that lower yields might trigger capital outflows, potentially undermining the CBN’s stabilization efforts and putting renewed pressure on the naira.

Analysts at CardinalStone noted in their fixed-income report that foreign interest remains strong in Open Market Operation (OMO) instruments, which offer a relatively stable and competitive yield of 27.3%. Unlike T-bills, OMO bills—exclusively available to foreign investors and banks—have seen milder yield moderation.

“Our scenario analysis suggests that significant capital outflows would only materialize if the one-year OMO rate declines to 22.0% or lower, provided the fundamental outlook for the naira remains relatively stable,” the report stated.

Even if foreign portfolio investors (FPIs) decide to exit, the report highlighted that finding reinvestment opportunities with comparable yields may be challenging across most frontier and emerging markets, especially as many central banks have already initiated monetary easing.

Secondary Market Performance

Since the last auction, the secondary T-Bills market has remained predominantly bullish. As of March 3, 2025, the average yield on T-Bills had declined by 206 basis points to 19.90%, compared to 21.96% post-auction.

Historical Yield Movements

The one-year T-bill yield rose from 9% in January 2024 to 23.44% by February, signaling the impact of rate hikes. It peaked at 27.33% in March, following the first MPC rate hike. By November, it hit a high of 30.7% before gradually declining to current levels.

Demand at the Auction

Investor demand for the one-year bill remained strong at N1.8 trillion, though lower than the N2.4 trillion seen in the previous auction. However, the CBN only sold N774.1 billion out of the N2.4 trillion subscription received.

Investor interest in the 182-day and 91-day bills remained subdued. Only N61.52 billion of the N70 billion 91-day bill was sold, while N50.94 billion of the 182-day bill was taken up. The 182-day yield dropped to 19.48% from 19.97%, while the 91-day yield remained steady at 17.76%.

The evolving yield environment will continue to shape investor sentiment and influence monetary policy decisions in the coming months.