THE Debt Management Office (DMO) has rejected nearly three-quarters of the N1.03 trillion investors offered to lend the Federal Government through Treasury bills (T-bills), accepting only N269.06 billion as it raised the interest rate on one-year bills for the first time since August.
The decision suggests that the government is limiting how much it borrows rather than accepting all the money investors are willing to provide, even as demand for its short-term debt remains strong.
At the October 14 auction, investors submitted N1.032 trillion in bids, but the DMO accepted only N269.06 billion, rejecting about N763 billion, or 74 percent of the total amount offered by investors.
The auction was conducted by the Central Bank of Nigeria (CBN) on behalf of the Federal Government, according to results analysed by the Financial Markets Dealers Association (FMDA).
The government had advertised N450 billion in T-bills for sale, but the amount it eventually allotted was about 40% below that target.
Treasury bills are short-term government securities through which the government borrows money from investors and repays it at maturity. Investors buy them to earn returns, while the government uses the funds to finance its cash requirements.
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One-year interest rate rises
The biggest change occurred in the one-year T-bill, which attracted N982.21 billion in bids against an advertised offer of N350 billion.
Despite receiving almost three times the amount it intended to raise from the instrument, the DMO accepted only N220 billion.
The stop rate, which is the rate at which the CBN or DMO accepts bids in an auction, increased slightly to 15.90 percent from 15.85 percent at the previous auction on October 7. This was the first increase since August, interrupting a downward trend in T-bill rates.
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In simple terms, the government agreed to pay a slightly higher return to investors whose bids it accepted for the one-year bill.
The increase was modest at five basis points, equivalent to 0.05 percentage points. However, it could signal that the decline in government borrowing rates seen in recent weeks is beginning to lose momentum.
The rate remains below the 17.59 percent recorded in August, when investors offered significantly more money than the government was prepared to accept.
Why did the government reject so much money?
The rejection of about N763 billion in bids is important because it shows that strong investor demand does not automatically translate into higher government borrowing.
Investors submitted bids for the one-year bill at rates ranging from 15 percent to 18.18 percent. The DMO accepted bids at a stop rate of 15.90 percent, leaving many investors without an allocation.
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The auction results do not specify the reasons for rejecting individual bids. However, FMDA interpreted the limited allotment as an attempt by the government to control borrowing costs rather than accept higher interest rates.
The approach has a trade-off. By refusing bids it considers too expensive, the government may limit the cost of servicing its debt. But accepting less money than planned could also leave it with less funding than it initially intended to raise through the auction.
Shorter-term T-bill rates remain unchanged
While the one-year rate increased, the rates on shorter-term T-bills remained unchanged. The 182-day bill, which matures in six months, attracted N30.10 billion in bids against N50 billion offered. The government accepted N29.54 billion at a stop rate of 15.80 percent.
The 91-day bill, which matures in three months, attracted N19.91 billion in bids against N50 billion offered. The DMO accepted N19.52 billion at an unchanged rate of 15.50 percent.
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The results show that investors’ demand was overwhelmingly concentrated in the one-year instrument, which accounted for about 95 percent of all subscriptions.
For investors, this suggests that the one-year bill remains the main focus of demand at the primary auction, although the return they receive depends on the accepted rate and the price paid for the security.
Rate reversal follows CBN’s interest rate cut
The increase in the one-year T-bill rate comes after several weeks of declining yields following the CBN’s decision to cut its benchmark interest rate by 350 basis points to 23 percent on September 22.
The one-year T-bill rate fell to 15.89 percent at the September 23 auction and declined further to 15.85 percent on October 7.
At the October 7 auction, the DMO allotted N968.47 billion, exceeding its N900 billion offer. Investors had submitted N1.683 trillion in bids for the one-year instrument alone, compared with N982.21 billion at the latest auction.
Total subscriptions across all three tenors consequently fell by about 42 percent between the two auctions, although demand remained concentrated in the one-year bill.
The latest increase does not necessarily mean interest rates will rise across the economy. However, it indicates that T-bill yields are no longer moving consistently downward.
What does this mean for investors and economy?
The auction has different implications for investors, the government and borrowers.
For investors, the 15.90 percent stop rate offers a reference point for assessing the return available on a one-year government security. However, it is not a guarantee that every investor will receive that rate, as allocation depends on the terms of individual bids.
For the government, rejecting most of the bids may help prevent borrowing costs from rising sharply. But if the government needs more money than it raises, it may have to seek funding through subsequent auctions or other financing channels.
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For businesses and households, T-bill rates can influence returns on savings and investment products, as well as the rates banks and other financial institutions demand on certain loans. The relationship is not automatic, because lending rates also depend on banks’ funding costs, credit risks and other market conditions.
Meanwhile, the DMO’s decision comes amid improved banking-system liquidity. FMDA reported that liquidity rose to N6.30 trillion from N3.71 trillion in the preceding week, supported partly by about N2.41 trillion in matured Open Market Operations (OMO) securities.
Despite the additional liquidity, the average secondary-market T-bill yield rose to 17.86 percent on October 13, ahead of the auction.
The contrast suggests that available cash in the banking system does not, by itself, guarantee lower government borrowing rates.
The next T-bill auction will provide a clearer indication of whether the DMO continues to restrict allocations to manage borrowing costs and whether the increase in the one-year rate marks a temporary adjustment or the beginning of a new upward trend.
