High treasury bills yield rates crowding out real sector as lenders, investors look more to treasury market

The current returns on Federal Government bonds and treasury bills at between 13.6 percent and 18.5 percent are serving as disincentives for both lenders and investors to invest in the real sector, according to the Lagos Chamber of Commerce and Industry (LCCI) in its mid-term assessment of the Buhari-led government.

Muda Yusuf, Director General of the LCCI said the high yield regime of between 15 and 18 percent is having negative impact on productive activities as it discourages both lenders and investors from putting their money in productive activities considering the risks and challenges of the operative business environment.

Muda disclosed this at a News Agency of Nigeria (NAN) forum Sunday on the mid-term assessment of the present administration. He said that many investors now prefer investing in treasury bills and bonds because they were not risky, tax free and with high returns.

According to him, commercial banks that are supposed to be lending to the manufacturers are also investing in treasury bills. He, therefore, advised promoters of small and medium enterprises (SMEs) to make their businesses more attractive to compete favourable for bank loans.

To this end, banks in Nigeria have a reduced incentive to lend to the private sector because of the favourable interest on government securities.

“They now have increased appetite for government securities, which may cannibalise private-sector credit,” says an analyst

Market watchers link the current high inflation to the operating lower treasury prices and the consequent higher yields, adding that conversely that T-bills prices tend to be high when inflation is low and yields drop.

T-bill rates are also driven by other economic factors. For example, during times of high economic growth, investors are less risk-averse and the demand for bills tends to drop. As T-bill yields rise, other interest rates rise as well. Other bond rates climb, the required rate of return on equities tends to rise, mortgage rates tend to rise and the demand for other “safe” commodities tends to drop.

Similarly, when the economy is sluggish and investors are leaving riskier investments, T-bill prices tend to rise and yields drop, which is currently in converse with the Nigeria of today.

In the world of debt securities, T-bills represent the greatest liquidity and the lowest risk to invested principal. They act as the closest thing to a risk-free return in the market. Therefore all other investments must offer a risk premium in the form of higher returns to entice money away from treasuries. In the current circumstance, the high yield and risk-free nature of treasury bills have lured many investors from the more risky manufacturing sector.

The CBN has been selling bills more than projected at yields below inflation in recent months to curb borrowing costs as it aims to fund half of this year’s forecast budget deficit of N2.36 trillion through the domestic market. In other words government fiscal policies are also encouraging more investment in treasury at the detriment of the productive sectors, where the public sector us crowding out the private sector from the loans market.

Yusuf noted that only a few SME operators could access bank loans because of stringent collateral requirements, adding that even the N220 billion-intervention fund from the Central Bank of Nigeria (CBN) could not be accessed because of the requirements.

He specifically advocated the need for the country to look inward by patronising said locally made products rather than importing foreign consumables to stimulate economic growth. He equally tasked the CBN to focus more on taming inflation and bank lending rates.

By Business a.m. live staff