Five things to learn from last week’s T-bill auction

The Federal Government’s latest Treasury bill auction offered an insight into its borrowing strategy, investors’ appetite for government securities and the changing direction of interest rates in the domestic debt market.

Despite receiving N1.91tn in bids against an advertised N800bn offer, the Debt Management Office accepted only N71.16bn, rejecting about N1.84tn.

The 28 October auction also saw the stop rate on the one-year T-bill fall to 15.80 per cent from 15.90 per cent at the previous auction.

Here are five key lessons from the auction.

The first lesson is that the government is prioritizing cheaper borrowing over raising more money.

The DMO’s decision to accept only N71.16bn out of N1.91tn in subscriptions suggests that it is unwilling to accommodate investors’ higher yield demands simply to raise more funds.

Although the government offered N800bn, actual allotment was less than nine per cent of that amount.

This indicates that the government is placing greater emphasis on containing borrowing costs, even if it means raising significantly less than planned at an auction.

Secondly, it was clear from last week’s auction that investors are still demanding high returns. Investors submitted bids ranging from 15.00 per cent to 18.24 per cent for the 364-day T-bill.

However, the government settled at 15.80 per cent, rejecting most of the bids. This shows that investors are still seeking relatively high returns on government securities, while the DMO is attempting to push borrowing rates lower.

Thirdly, the one-year bill remains the centre of investor interest. The 364-day instrument attracted about N1.84tn in bids against an offer of N600bn. By comparison, the government offered N100bn each for the 91-day and 182-day bills.

The concentration of demand in the one-year instrument suggests that investors remain interested in locking funds into longer short-term government securities rather than concentrating only on shorter maturities.

The fourth lesson is that demand was concentrated in one-year bills, not across all maturities. The 64-day bill attracted about N1.84tn in bids, while the 91-day and 182-day bills received N51.56bn and N20.27bn, respectively.

In fact, subscriptions for both shorter-tenor instruments fell below their N100bn offers. This suggests that investors were more interested in locking money into one-year securities than in the shorter options.

The DMO accepted N22.33bn on the 91-day bill and N10.45bn on the 182-day instrument, compared with N38.38bn on the one-year bill.

Also, excess liquidity helped to drive demand, but did not force the government to borrow more. Banking system liquidity rose to N8.59tn ahead of the auction, from N6.94tn at the end of the previous week, supported by N2.13tn in OMO maturities.

The increased liquidity helped sustain demand for T-bills, with total subscriptions rising to N1.91tn from N1.03tn at the previous auction.

However, the DMO still accepted only N71.16bn. This shows that abundant liquidity can increase investors’ appetite for government securities without compelling the government to accept higher borrowing costs.

The T-bill market is experiencing downward pressure on rates, supported by abundant liquidity and strong investor demand. But the DMO is using its control over allotments to resist higher interest rate demands.

“The key takeaway is that investors may have plenty of money to lend, but the government is becoming more selective about the price it is willing to pay for that money,” said an Abuja-based fixed income analyst, Idjie Adoboma.