Culled—Proshare
September 11, 2018/Meristem Research
Issue on Offer/Summary
The Central Bank of Nigeria(CBN) is scheduled to hold a Treasury Bills (T-Bills) Primary Market Auction (PMA) on the 12thof September 2018. T-Bills worth NGN136.31bn will mature, while an equal amount is expected to be issued in 91-day, 182-day and 364-day instruments. The CBN is expected to auction NGN6.22bn, NGN4.00bnand NGN126.09bn in the 91-day, 182-day, and 364-day instruments respectively.
Outlook on Yields /Advised Stop Rates
Yields have enjoyed significant upward movement since the last primary market auction on the 29th of August 2018. The yield on all instruments advanced, with the shorter instruments recording stronger advancements in yield. Consequently, the average T-Bills yield advanced by 0.86% to settle at 12.79% as at September 10th, 2018.
The 1M tenor has experienced the most significant advancement in yield, advancing by 1.95% since the last auction. The 6M instrument however experienced the smallest yield advancement of 0.23%. With two FED rate hikes in the offing, we expect rates to remain attractive in the coming auctions, to keep the market attractive to foreign investors.
The last primary market auction showed that investors’ appetite remained positive in the Nigerian market. The 91-Day, 182-Day and 364-Day instruments on offer were oversubscribed with respective bid-to-cover ratios of 1.00x apiece.
The Nigerian Bureau of Statistics is expected to release the inflation report for the month of August in the coming days. Nigeria’s inflation rate has trended southwards for eighteen consecutive months and is expected to go lower, even as the base effect vanishes. Nonetheless, we expect the improving macroeconomic variables to keep investor confidence at desired levels, in an attempt to mitigate the downsides of political jitters in the market.
We advise rates with the dual purpose of achieving the best possible yields, as well as ensuring the success of the bid. The advised stop rates for the respective instruments are listed below:
91-Day NGN6.22bn 11.00% – 11.30%
182-Day NGN4.00bn 12.00% – 12.30%
364-Day NGN126.09bn 12.90% – 13.20%
Participation Process
The T-bills Primary Auction bid holds twice in a month (i.e. every other Wednesday). The above likely stop rates are our estimates and might not necessarily hold true, as the final decision always lies with the CBN based on the auction process.
Recent Stop Rates on Past Auctions for 91-Day, 182-Day and 364-Day Instruments
About Treasury Bills
Treasury Bills (T-bills) are marketable money market securities that serve the purpose of raising money for the government and also help in monetary policy management of the Central Bank. T-bills are short-term securities that mature in 1 year or less from their issue date. They are usually issued with 3-month, 6-month, and 1-year maturities.
How is Return Determined?
T-bills are purchased for a price that is less than their par (face) value; when they mature, the government pays the holder the full par value. Effectively, your interest is the difference between the purchase price of the security and what you get at maturity.
The advised stop rate is different from the annualized yield of instruments. For example; the annualized yield of a 91-day T-bill, with a stop rate of 15.30% is 15.90%. If you buy a 91-day T-bill with a face value and stop rate of N1, 000,000 and 15.3% accordingly, the discounted value would be N962, 274. The difference between the face value and purchase price, which is N37, 726, is the money return and it implies 15.9% yield on annual basis.
However, the holding period yield for this instrument is 3.75% since it is held for a 91-day period (3 months), and not a year.
How does the Auction Process work?
Treasury bills (as well as notes and bonds) are issued through a competitive bidding process at auctions.
Primary market trading of Treasury bill instruments entails auctions by the country’s monetary authority – The Central Bank of Nigeria. T-bills are auctioned at established rates which determine the return to investors. Purchasing these instruments in the primary market and holding it until maturity would mean that the investor gets a fixed interest payment.
Benefits of T-bills
The biggest reasons that T-Bills are so popular are that they are one of the few money market instruments that are affordable to the individual investors. Other positives are that T-bills (and all Treasuries) are considered to be risk-free investments because the Federal Government backs them. Also, T-bills are tax-free, unlike equities.
The only downside to T-bills is that investors will not get a great (alpha) return because Treasuries are considered “exceptionally safe”.