CBN Hikes T-Bill Interest Above Inflation: A Bold Move to Attract Naira Assets

​The Central Bank's Aggressive Stance on Naira Assets

​In a significant monetary policy action, the Central Bank of Nigeria (CBN) has raised the spot rate on long-term Nigerian Treasury Bills (T-Bills), pushing the yield above the prevailing inflation rate for the first time in a while. This aggressive rate hike is a strategic maneuver designed to manage liquidity, combat inflationary pressures, and enhance the attractiveness of Naira-denominated fixed-income assets.

​The decision followed a main auction where the CBN observed tight subscription levels and a strong demand signal from investors seeking higher real returns on their capital.

​Key Auction Results and the Rate Shift

​The CBN offered N700 billion worth of T-Bills across the standard tenors (91-day, 182-day, and 364-day). While the total subscription slightly exceeded the offer at about N775 billion, the focus remained on the long end of the market:

​91-Day Bills: Allotted at a spot rate of 15.30% (unchanged).

​182-Day Bills: Allotted at a spot rate of 15.50% (unchanged).

​364-Day Bills (The Focus): This longest tenor saw the most dramatic change. The CBN raised N636.46 billion and hiked the spot rate to 17.50%. This represents a substantial increase from the 16.04% recorded at the previous auction.

​The key takeaway is that the 17.50% yield on the one-year T-Bill now surpasses Nigeria's current inflation rate of 16.05% by 145 basis points (1.45%).

​Understanding the Economic Significance

​This action is crucial for investors and the broader economy, achieving several policy objectives:

​1. Positive Real Return

​By offering a yield higher than the inflation rate, the CBN ensures that investors are getting a positive real return on their money. This is vital for attracting capital, particularly for the long-term 364-day bills, as it means the interest earned on the investment is greater than the rate at which purchasing power is eroding. This move aims to lure investors back into local currency assets and away from the parallel foreign exchange market.

​2. Tightening System Liquidity

​The significant hike in the benchmark rate is a core tool of monetary policy tightening. Higher interest rates on government securities make it more expensive for banks and financial institutions to hold onto cash, thereby mopping up excess Naira liquidity from the system. Reduced money supply is a direct mechanism used by the CBN to curb persistent inflation.

​3. Investor Appetite for Duration

​The auction results showed that investors staked about 90% of their bids on the 364-day maturity bills. This surge in demand for the longest tenor confirms that investors are actively seeking higher returns and are willing to park funds for a longer duration when the real return is attractive. This trend reflects growing confidence in the CBN’s commitment to providing fair value on Naira assets.

​In summary, the CBN's decision to price the long-term T-Bill above inflation is a strong signal of its dedication to price stability and its efforts to restore the profitability and confidence necessary to stabilize the financial markets.