CBN Sees Strong Demand for Long-Term Government Securities Amid Inflation Surge
The Central Bank of Nigeria (CBN) has reported a notable increase in investor demand for longer-tenured government securities as inflation continues to surge. According to the CBN’s second-quarter 2024 economic report, investors are increasingly turning to longer-dated securities as a means of hedging against rising inflation, signaling a shift in market sentiment.
The report highlights that investors are now more inclined toward longer-tenure options, with the CBN noting: “There was a preference for longer-tenured government securities, reflecting investors’ precautionary motive against rising inflation.”
Decrease in NTB Subscriptions, but Increased Yields
The demand for Nigerian Treasury Bills (NTBs) saw a decline in the second quarter of 2024. The total amount offered, subscribed, and allotted for 91-day, 182-day, and 364-day NTBs dropped significantly, with the total for the quarter standing at N1.47 trillion, N6.98 trillion, and N2.81 trillion, respectively. This is down from N2.21 trillion, N12.22 trillion, and N5.55 trillion in the previous quarter.
However, despite the lower subscriptions, the stop rates (the minimum accepted yield in treasury auctions) increased significantly across all maturities. The average stop rate reached 18.47%, up from 11.97% in the first quarter of 2024, signaling that the CBN is adjusting its monetary policy to attract investors towards shorter-term securities amidst a market favoring longer-term placements.
Strong Demand for Federal Government Bonds
Investor interest in Federal Government Bonds (FGN Bonds) remained robust, despite a reduction in the amount offered. The government offered N1.35 trillion in FGN bonds, but investors subscribed to N1.78 trillion, surpassing the offer by N0.43 trillion. Ultimately, N1.30 trillion worth of bonds were allotted, reflecting continued strong demand for these instruments.
The marginal rates for FGN Bonds were also adjusted upwards, rising to 20.37% from 17.73% in the previous quarter. This increase in yields reflects the government’s efforts to attract investors in a challenging inflationary environment while offering returns that can outpace rising prices.
Increased Participation in Open Market Operations (OMO)
The CBN’s Open Market Operations (OMO) also saw an uptick in participation, with total offerings and allotments increasing significantly. The total amount offered increased to N2.70 trillion, while the total allotments surged to N4.36 trillion. This marks a substantial rise from the previous quarter, where offerings and allotments stood at N1.45 trillion and N1.97 trillion, respectively.
The increased participation was largely driven by higher stop rates of 20.62%, compared to 15.75% in the previous quarter, indicating that the CBN’s strategy to attract investor interest in OMOs by offering more attractive yields is yielding results.
Policy Context: Inflation and Monetary Tightening
The shift in investor preferences toward longer-tenured securities aligns with the CBN’s broader monetary policy strategy, which has focused on tightening policy to contain inflation. Inflation in Nigeria reached 34.19% in Q2 2024, up from 33.20% in the previous quarter, with core inflation (excluding volatile food and energy prices) rising to 27.40% from 25.90% in Q1. These elevated inflation rates have driven investors to seek instruments that offer more predictable returns.
In response, the CBN has raised interest rates to maintain the appeal of government securities. The Monetary Policy Rate (MPR) was adjusted multiple times in 2024, including a recent increase to 27.25% in September, aiming to curb inflation and stabilize the financial market.
Market Outlook and Implications for Financial Stability
The increased demand for government securities, particularly long-term instruments like FGN Bonds, and the rise in OMO participation, suggests that the CBN’s strategy to manage inflation and liquidity is gaining traction. For investors, the move toward longer-tenured securities offers a hedge against inflation while providing more stability in an increasingly volatile market.
As inflation remains high, investors are likely to continue favoring these instruments, which provide a relatively safe haven amid broader economic challenges. The CBN’s ongoing adjustments to interest rates and its focus on managing liquidity are expected to continue shaping investor behavior in the second half of 2024, with a particular focus on securing returns that can outpace inflation.
Key Takeaways:
- Longer-tenured government securities are in higher demand as investors seek inflation protection.
- NTB subscriptions decreased, but yields increased significantly, signaling higher investor appetite for shorter-term instruments.
- FGN Bonds saw strong demand despite a reduction in the offered amount, with yields rising to 20.37%.
- OMO participation surged, with total offerings and allotments reaching N2.70 trillion and N4.36 trillion, respectively.
- The CBN’s monetary tightening and higher interest rates are expected to continue influencing investor behavior, particularly in government securities.
In this environment, the CBN’s efforts to offer attractive returns and manage liquidity appear to be playing a crucial role in maintaining financial stability and investor confidence in the Nigerian market.
