The Central Bank of Nigeria has reopened Open Market Operation bills, commonly called OMO bills, to individual investors.
Until now, this part of Nigeria’s fixed-income market was mainly for banks and large institutions. Individuals can now take part through their banks, although minimum amounts and processes may vary.
The short answer: OMO bills may be attractive if you have a lump sum you can leave untouched until maturity. For smaller amounts, or money you might need at short notice, they may be less practical than the headline rate suggests.
First, what is an OMO bill?
An OMO bill is a short-term investment issued by the CBN.
The CBN uses these bills to pull excess cash out of the financial system. You invest for a fixed period, and at maturity you get your money back plus your return.
They look a lot like Treasury bills, but they exist for different reasons. Treasury bills help the Federal Government borrow. OMO bills help the CBN control how much money is circulating in the economy.
Does a 20% rate mean you earn 20% in a few months?
No, and this is where the numbers get easy to misread.
At the first auction after the market reopened, a 138-day bill cleared at a stop rate of 20.01%. That rate is quoted per year. Your money is invested for only 138 days, so you do not earn the full annual rate.
It is also a discount rate, not the percentage gain on the cash you hand over. You do not buy these bills at face value. You buy them below face value and are paid the full amount at maturity, and the difference is your return.
So ₦1 million invested at that rate buys about ₦1.08 million of face value and returns roughly ₦81,800 over 138 days, before any bank charges or tax that may apply. Not ₦200,000.
If you like the maths: an ₦81,800 gain on ₦1 million is an 8.18% return over the 138 days you are invested. Annualised without compounding, the return on the cash invested works out at about 21.6%. It is higher than the 20.01% stop rate because the two figures measure different things.
Why are investors paying attention?
The rate compares well with Treasury bills. At the Treasury bill auction the day before, the 91-day cleared at 16.30% and the 364-day at 17.59%. The 138-day OMO bill offered a higher annualised rate than the one-year Treasury bill, despite asking for a much shorter commitment.
Inflation is the other reason. Headline inflation was 15.43% in July, so the quoted rate sits above the most recent reading. That opens up the possibility of a positive real return. If your return over the investment period beats the rise in prices over the same period, your money will have grown in real terms. Be careful with the comparison, though. The 15.43% describes the twelve months behind us, and nobody knows what prices will do over the next 138 days.
Demand at the auction was heavy. Total bids reached ₦4.93 trillion, and the CBN allotted about ₦2.6 trillion. The published figures do not show how much of that came from individual investors.
What to check before you invest
The headline rate is only one part of the decision. You also need to think about what happens when the bill matures, whether you can access your money early, and what your bank will require.
When your bill matures in a few months, the rate available then may be lower. OMO rates respond to liquidity conditions and CBN policy, so they can change considerably from one auction to the next. A 20% bill today is not a promise of 20% in January.
If you need your money early, your bank may be able to sell the bill in the secondary market, but an immediate sale at an attractive price is not guaranteed. The value of a fixed-income security also moves with interest rates. It is safest to invest on the assumption that you will hold the bill to maturity.
How much you need may depend on your bank, which submits bids and settles transactions on your behalf. Ask about its minimum investment and charges, and about how the return will be taxed, before you make plans. What you keep matters more than what the auction pays.
How this compares with a money market fund
If you invest in smaller amounts, or you may need the money before maturity, a money market fund may be more practical. Money market funds manage maturities and reinvestment on your behalf and generally offer easier access to your money. Their yields change over time, fees apply, and returns are not guaranteed. Disclosure: Cowrywise provides access to money market funds.
Either way, ask four questions before the headline rate wins you over:
- When will I need this money?
- Can I leave it untouched until maturity?
- What do I actually keep after fees and tax?
- Does this fit the goal I am saving towards?
The door to OMO bills is open. Whether you walk through it depends less on the rate on the screen and more on when you need your money back.
