At Record Low, T-Bill Rate Positive for FG Refinancing, Equities
Treasury bill rate at record low is positive for the Federal Government to refinance existing obligations at cheap cost as well as for the equities market, says CSL Stockbrokers.
The Nigerian Stock Exchange has been on sustained rally in the recent time, the development largely attributed to low yields on fixed income market instruments.
In its macroeconomic note, CSL Stockbrokers thinks the prevalent low yield environment is artificial considering it is not representative of current macroeconomic fragilities.
Recalled that the Nigerian Treasury Bills (T-Bills) auction conducted by the Central Bank of Nigeria (CBN) on Wednesday recorded significant oversubscription with unsuccessful bids reported at N667.1bn due to robust financial system liquidity amidst limited investment options.
Stop rates at the auction settled at 0.34%, 0.5% for the 91-day, & 182-day maturities, and 0.98% for the 364 day instrument.
CSL Stockbrokers said the CBN’s policy which has prevented non-banking corporates from accessing the OMO window has limited fixed income options for them to Nigerian Treasury Bills (NTB), fixed deposits, Eurobonds and FGN bonds.
This has led to a surge in demand for NTB which has exerted downward pressure on rates (in primary & secondary markets).
For example, stop rate for the 364-day bill at the bi-weekly primary market auctions (PMAs) has slumped to less than 1% from about 11.5% less than a year ago when the policy was announced .
“We realise that interest rates on NTB at these low levels though not favourable for the investor may be of benefit to the economy”, CSL Stockbrokers said.
The firm explained that high double digit returns on risk-free NTB provided banks, PFAs and other asset managers a riskless outlet to make money which generally discouraged lending and other risky investments which would be expected to support economic growth.
From the government standpoint, analysts said interest rate at double digit meant raising both short term and long term finance was too expensive and unfavourable for already precarious debt service cost level.
Thus, the lower interest rates gives the Federal government opportunity to refinance existing NTB obligations at cheap cost, the firm stated.
“That said, we think the prevalent low yield environment is artificial considering it is not representative of current macroeconomic fragilities”, CSL Stockbrokers said.
In addition, analysts stated that there exists an unusually huge spread between the low rates on government issues and borrowing costs from banks in Nigeria reflective of the macroeconomic concerns and huge business environment risk.
However, blue-chip corporates have taken advantage of the record low rates to raise cheap short term financing through commercial paper issuances.
“Thus, we think the CBN may not necessarily achieve its ambition of forcing banks’ borrowing rates in the wider economy lower which disadvantages less fashionable SMEs and small corporates.
“Nevertheless, we think the CBN will maintain its dovish stance on interest rates in the short to medium term which we expect will remain positive for the equities market”, the firm explained.
Market data shows that the NSE has gained 9.7% year to date. This has been largely supported by local investors’ participation.
“Following two consecutive years of negative close, we believe the market will close positive in 2020, albeit market gains and bullish sentiments continue to be capped by current macroeconomic fragilities.
“We expect the current robust liquidity in the financial system to remain supportive of the bullish trend in Nigerian equities.
“However, we note that as this huge liquidity thins out, bullish sentiments will largely be supported by decent financial performance by listed corporates.
“Lastly, we also expect the high dividend yield bias to remain favourable for stocks with high dividend yield”, CSL Stockbrokers explained.
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At Record Low, T-Bill Rate Positive for FG Refinancing, Equities
