Interest on Short Term Borrowing Exceeds FG Bond Rates
The central bank priced 364-day treasury bills at 19% while the average stop rate printed at 18.75% at the debt management office’s latest undersubscribed FGN bond auction.
Nigeria’s large borrowing size begin following the apex bank decision to stop ways and means lending to federal government. With large budget deficit, the government has little or no choice that to visits the local debt capital market.
Not minding if private sector would be crowed out, the year has seen large scale borrowing from the central bank and debt office.
However, given a large money supply in the circulation, subscription levels have been relatively impressive in the last two major primary market auctions conducted by the CBN with some N2 trillion parked into treasury bills by investors.
Spot rates was adjusted upward as government set out to attract inflows from local and foreign investors in 2024. Thus far, the apex bank has conducted five open market operations with higher interest rates.
The yield curve has however inverted as demand for short dated instruments continues to increase amidst concerns for inflation exposure.
What is driving yield curve inversion in Nigeria’s local debt capital market? Rates on the long-dated federal government of Nigeria bonds fell below short-term equivalents.
The debt office appears to frontload borrowings and CBN also selling treasury bills in quantum as total credit supply increases. Last week, CBN raised more than N1 trillion from treasury bills auctions while DMO borrowed N1.49 trillion.
In the fixed income market, yields have remained elevated, trailing the annual inflation rate. Isn’t this an incentive for banks to pump funds into investment securities versus lending to the private sector?
The local debt capital market could be left dry by a nasty increase in borrowing size but banks, and other authorised dealers are liking it. The result is that some banks in the industry were scrambling for funds.
Lenders then pitched a tent at the Central Bank to borrow from a standing lending facility. Exactly on Friday, the apex bank lends local deposit money banks N1.4 trillion to augment their funding position.
Default rates on borrowed funds have been projected to rise in 2024 due to economic dislocation driven by government policies. Why should banks lend when N1 trillion investment in government securities can comfortably return about 20% annual return or N200 billion?. #Interest on Short Term Borrowing Exceeds FG Bond Rates
