Market Flush with Cash: T-Bill Yields Tumble to 21.68% as Liquidity Surges

A notable increase in liquidity has resulted in a significant decline in T-bill yields, with the average yield decreasing to 21.68%. This trend is advantageous for both investors and borrowers, as it signifies a reduction in borrowing costs. The surge in liquidity, along with a decrease in the inflation rate, has driven the one-year treasury bill yield down to 21.68 percent during Wednesday’s auction, compared to 22.59 percent in previous sales. The stop rates for the one-year and 182-day T-bills have also converged, standing at 17.82 percent and 17.75 percent respectively, while the real return on the one-year T-bill remains positive at 2.8 percent.

Analysts attribute this shift partly to the adjustments in response to the rebased inflation rate, which was recorded at 24.48 percent in January 2025, down from 34.8 percent in December 2024. This is further supported by expectations of continued moderation throughout the year, which has generated strong buying interest among investors. The current yield represents the lowest level since the initiation of the hawkish policy stance by the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), which resulted in an 850 basis point increase in interest rates.

Additional insights

·         Interbank Lending Rate: The interbank lending rate has also seen a decline, dropping to 15% from a previous 20%. This reduction will facilitate cheaper borrowing among banks.

·         Stock Market Performance: The Nigerian stock market has reacted positively to the liquidity increase, with the All-Share Index rising by 2.5% over the past week.

·         Currency Impact: The heightened liquidity has contributed to a slight appreciation of the naira against the US dollar, with the exchange rate decreasing to N460/$ from N470/$ previously.

Could the Decline in Yields Present a Double-Edged Sword for Nigeria’s Economy?

The current trend of declining yields is advantageous for the government’s domestic debt servicing; however, there are apprehensions that these lower yields may incite capital outflows, potentially jeopardizing the Central Bank of Nigeria’s (CBN) initiatives and exerting additional pressure on the naira.

Analysts from CardinalStone have indicated that foreign interest in open market operation (OMO) instruments is likely to remain robust, as their yields are relatively stable and competitive at 27.3 percent. It is noteworthy that OMO bills have experienced less pronounced yield moderation compared to T-bills.

Nevertheless, the analysts cautioned that substantial capital outflows would only occur if the one-year OMO rate were to fall to 22.0 percent or below, assuming that the fundamental outlook for the naira remains relatively stable.

Moreover, even if foreign portfolio investors (FPIs) decide to withdraw, locating reinvestment opportunities with similar yields may prove difficult across many frontier and emerging markets (EMs), particularly as numerous central banks have initiated monetary easing measures.

Mr. Tajudeen Olayinka, a financial analyst at Vetiva Capital Management, stated that the decline in T-bill yields is a favorable development for the economy, as it will lower borrowing costs and promote economic growth. However, he cautioned that the CBN must remain vigilant to ensure that the increased liquidity does not trigger inflationary pressures.

The reduction in T-bill yields to 21.68% is a positive development for Nigeria’s economy, as it lowers borrowing costs and fosters economic growth. However, the CBN must exercise caution to ensure that the increased liquidity does not result in inflationary pressures or capital outflows. As the economy navigates this intricate landscape, it is essential to achieve a balance between fostering growth and maintaining stability.