Negative real T-bills rate: an investment case for riskier assets?

Negative real T-bills rate: an investment case for riskier assets?

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Earlier today, the NBS published Nigeria’s inflation report for Oct-19. Much in line with our expectation, the headline inflation rate rose to 11.61% y/y -36bps above 11.24% printed in Sept-19 as a month on month inflation rate increased 1.07% in October. Notably, recent pressure on rice level was driven by the food sub-index which spiked to 14.09% in Oct-19 (vs. 13.51% in Sept-19) amid continued closure of the border, throughout the review period.

Negative real T-bills rate: an investment case for riskier assets?

Interestingly, the headline inflation rate at 11.6% relative to the single-digit nominal rate on FGN’s T-bills simply means that the real interest rate on government bills is negative. For context, average top rates on the most recent FGN T-bills auctioned was 8.9% across tenor, while the secondary market rate settled at 9.0%. So, we are forced to ask, what is the incentive for investing in T-bill if the objective of capital preservation is out of reach?

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Certainly, a negative interest rate environment will discourage investors from looking for cheap returns, even though risk-averse investors will continue to play in the space. As such, we expect recent pressure on headline inflation to further spur interest in riskier assets such bonds and equities which are more attractive in terms of real returns amid increased system liquidity spurred by the CBN’s decision to shrink its balance sheet.

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