Declining Inflation, Liquidity Surge Drive Treasury Bill Yields to 21.68%

The yield on Nigeria’s one-year treasury bill fell to 21.68 percent at Wednesday’s auction, down from 22.59 percent at the previous sale, as a surge in system liquidity and a decline in inflation rates influenced investor sentiment. The stop rates for the one-year and 182-day treasury bills also narrowed, standing at 17.82 percent and 17.75 percent, respectively. Notably, the real return on the one-year treasury bill remained positive at 2.8 percent, reflecting the impact of the rebased inflation rate, which dropped to 24.48 percent in January 2025 from 34.8 percent in December 2024.

Analysts attribute the declining yields to improved liquidity and expectations of further moderation in inflation, which have fueled strong investor demand. This marks the lowest yield since the Central Bank of Nigeria (CBN) began its hawkish monetary policy stance, which saw interest rates rise by 850 basis points.

Matilda Adefalujo, a fixed-income analyst at Meristem, had earlier projected a decline in stop rates, citing improved system liquidity and maturing obligations. “With system liquidity at N582.95 billion as of Monday and maturing obligations of N1.30 trillion—twice the amount offered—investors are net-liquidity receivers,” Adefalujo noted. She added that the CBN might seize the opportunity to further ease borrowing costs by lowering stop rates across all tenors.

Implications for the Economy

While the declining yield environment is favorable for the government’s domestic debt servicing, concerns remain about potential capital outflows. Analysts at CardinalStone highlighted that foreign interest is likely to remain strong in open market operation (OMO) instruments, which offer a relatively stable and competitive yield of 27.3 percent.

“Significant capital outflows would only materialize if the one-year OMO rate declines to 22.0 percent or lower, provided the fundamental outlook for the naira remains stable,” the analysts stated. They also noted that finding comparable yields in other frontier and emerging markets would be challenging, as many central banks have already begun monetary easing.

Impact on the Secondary Market

The treasury bills secondary market has remained predominantly bullish since the last auction. As of March 3, 2025, the average yield on treasury bills had fallen by 206 basis points to 19.90 percent, compared to 21.96 percent post-auction.

Timeline of One-Year Treasury Bill Yields

The yield on the one-year treasury bill has seen significant fluctuations over the past year. It rose from nine percent at the first auction in January 2024 to 23.44 percent by the end of February, reflecting the CBN’s rate hikes. It peaked at 30.7 percent in November before gradually declining to current levels.

Auction Demand

Demand for the one-year treasury bill remained robust at N1.8 trillion, though lower than the N2.4 trillion recorded at the previous auction. The CBN sold N774.1 billion worth of treasury bills out of the N2.4 trillion subscription. Meanwhile, the 182-day and 91-day bills saw minimal interest, with only N61.52 billion and N50.94 billion sold, respectively. Yields on the 182-day bill dropped to 19.48 percent, while the 91-day bill remained steady at 17.76 percent.