Nigeria’s treasury bill (T-bill) market is witnessing a significant shift, as the one-year T-bill yield declined to 21.68% in the latest auction on February 5, 2025, down from 22.59% in the previous auction. This drop is largely influenced by increased liquidity in the financial system and a notable slowdown in inflation. With analysts predicting further yield moderation throughout the year, investors and policymakers are closely monitoring the evolving market dynamics.
Why Are T-bill Yields Dropping?
1. Surge in Market Liquidity
The financial system has seen a substantial rise in liquidity, with N582.95 billion in system liquidity and N1.30 trillion injected through maturing obligations—twice the amount offered at the auction. This excess cash has fueled increased demand for T-bills, enabling the Central Bank of Nigeria (CBN) to lower borrowing costs by reducing stop rates across different maturities.
2. Inflation Slowdown
Nigeria’s rebased inflation rate dropped from 34.8% in December 2024 to 24.48% in January 2025, making T-bills more attractive to investors seeking positive real returns. Lower inflation increases investor confidence in fixed-income securities, driving demand and pushing yields downward.
What Does This Mean for Nigeria’s Economy?
Pros: Lower Borrowing Costs for the Government
Declining T-bill yields reduce the government’s domestic debt servicing costs, making borrowing more affordable and freeing up resources for economic development projects.
Cons: Potential Capital Outflows
While lower yields benefit the government, they may discourage foreign investors seeking higher returns. If yields fall too far, capital flight could become a concern. However, foreign investors remain attracted to Open Market Operation (OMO) bills, which currently offer a higher yield of 27.3%. Analysts suggest that capital outflows may only become significant if the one-year OMO rate drops to 22% or lower, assuming the naira remains stable.
Impact on the Secondary Market
Since the last auction, the secondary T-bill market has turned bullish, with yields dropping by 206 basis points to an average of 19.90% as of March 3, 2025, compared to 21.96% post-auction. Investors are rushing to lock in existing rates before further declines, reinforcing strong demand in Nigeria’s fixed-income space.
What’s Next for T-bill Yields?
With an estimated N4.5 trillion set to enter the system in March, liquidity conditions are expected to remain favourable, likely pushing yields even lower. The CBN faces a balancing act—maintaining market stability while ensuring Nigeria remains attractive to foreign investors.
Conclusion
Nigeria’s T-bill market is evolving amid shifting liquidity conditions and inflation trends. While lower yields benefit the government’s borrowing costs, they also pose risks related to capital outflows. Investors should stay vigilant, particularly as liquidity injections continue and market dynamics adjust.