Treasury bills auctions are bi-weekly auctions announced by the Central Bank of Nigeria in coordination with the Debt Management Office.
The auction is conducted every other Wednesday based on the announcement of the CBN. These auctions provide a critical avenue for the government to raise money and direct monetary policy.
T-bills auctions are not just about raising new money though. A significant portion goes to refinancing maturing bills, paying back investors whose 91-day, 182-day and 364-day bills are due.
This rollover means the government must constantly go back to the market. If demand drops one Wednesday, it could create a funding challenge.
The CBN also uses the auction as a liquidity management tool to mop up excess cash from the banking system and fight inflation. This is why the auction happens every other Wednesday.
Implications: How Government T-bills Impact Bank Interest Rate
For the government, the strong demand provides an easy and relatively cheap way to fund the budget deficit.
However, it also impacts economic activities. T-bills rate impact lending, and also bank interest rate. With risk-free returns on T-bills currently attractive, banks and other financial institutions may reduce lending to the private sector.
This means small businesses, manufacturers, and real estate developers could find it harder and more expensive to access credit. When banks prefer T-bills, lending to SMEs slows down and that affects jobs and economic growth. This does not exactly entirely inhibit the capacity of companies to still raise finance though. In today’s world, there are many sources of alternative financing which can increase working capital for business.
The equities market is one such avenue. For SMEs, there are alternative financing like microfinance banks, fintechs that offer microcredit and development financing. While, many high-growth businesses also have other potential like venture capital, private equity and angel investing among others.
However, more importantly, Treasury bills rate still impact lending in that it sets the base interest rate for the money market which includes bank lending rate. This means that bank loans may also offer interest with a base as that of government treasury bills.
Despite this though, government treasury offers access to savings gain for Nigerians with deposits in banks which means Nigerian deposits and pensions can also gain with the interest income from government savings schemes such as T-bills. Therefore, treasury bills aside from financing government activities, acting as a monetary policy tool to mop up excess money supply or spur economic growth, can also incentivize savings within the local economy.