By Eniola Olatunji

Copyright businessday

The Central Bank of Nigeria (CBN) raised the yields on one-year Nigerian treasury bills (T-Bills) to 21.49 percent at the most recent primary market auction. It represented the third consecutive time the apex bank was raising the yields on one-year NT-bills

The increment started at the first auction in August when yields spurred to 19.76.

This marked a reversal from the downward trend seen most of this year. Yields on the one-year T-bills declined to 18.96 percent in July from 29.1 percent at the start of the year.

The trend mirrors the decline in inflation, which eased from 24.50 percent to 21.88 percent, fuelling expectations of a possible rate cut later this year.

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Many investors were surprised at the turn of events and wondered what it meant for their investments and the rate cut.

What is driving the increase?

In August, the Debt Management Office (DMO) revised its third-quarter FGN bond issuance calendar, doubling the offer size from an average of N50 billion to N100 billion.

Investors interpreted this as a signal of rising government financing needs, demanding higher yields and pushing fixed-income rates up by 63 basis points during the month.

Yet, actual government borrowings via NTBs and bonds came in at N613.2 billion, down 9.5 percent month-on-month from July, indicating that funding pressures might not have been as immediate as initially feared.

Peter Nwachukwu, group dealer/head trader at UBA, in an interview with CNBC, pointed out that at the recent OMO auctions, the CBN tilted more towards the short end (84-day) possibly in anticipation of a rate cut, while simultaneously boosting yields on 365-day bills to entice domestic investors.

“The uptick in yields on the 365-day bill at recent auctions is to encourage local investors. Also, the longer tenor gets the most subscriptions,” Nwachukwu said.

At the latest auction, the CBN offered a total of N480 billion worth of bills. It received bids totalling over N1 trillion, with over 95 percent from the 365-day bills. Despite the high demand, the CBN only accepted bids for N585.25 billion.

In the same week, the CBN offered a N600 billion Open Market Operations (OMO) bill for 84 days.

Nwachukwu explained why holding long-dated NT-bills is better than keeping high-yield short-dated OMO bills. “Holding the 365-day bills gives a higher interest rate and allows them to build a position, as it provides a breather in terms of investment,” he said.

“Investors are hesitant to buy 150-day OMO bills at 26 percent yields when 365-day T-bills are also available, even though OMO bills have better yields. The concern is that when the OMO matures in December, the central bank might have cut rates, forcing investors to reinvest their funds at a much lower yield of around 14 percent, which would negatively impact their returns and liquidity.”

What do rising yields say about expected rate cut?

The Monetary Policy Committee (MPC) will next meet on Monday, September 22, and Tuesday, September 23, 2025.

With declining inflation rates, there are expectations of rate cuts.

Abdulrauf Bello, portfolio manager at Cowrywise, explained that inflation, although declining, remains at relatively high levels – above 20 percent.

“Although oil production may have improved, oil prices are not in Nigeria’s favour. So, we cannot be that confident about oil inflows,” he said.

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“FPI inflows are still the major drivers of FX inflows, and you don’t want to do anything that will spook them. Also, domestic investors have calmed with their dollar demand since local rates have become competitive. The moment you make those rates uncompetitive – given the inflation rate – you risk an instability in the FX market as people will demand another currency,” he said.

Similarly, analysts at Cardinalstone, an investment firm, said that while they don’t anticipate any policy change at the September MPC, they see a scope for a 50 basis points (bps)–100bps rate cut at the November meeting, supported by ease of inflation and a more stable macro backdrop.

How does it affect investments?

The secondary market closed active last week, as unmet demand from the auction spilled into the secondary market, and the newly issued 364-day bill traded around the 17.30 percent level.

Other investment schemes such as mutual funds will also see an increase in its yield in the near-to-medium term.