Treasury bill liquidity emerges as test of Nigeria’s banking reforms

Nigeria’s efforts to deepen its financial markets and strengthen monetary policy transmission are facing a critical test as the government moves to improve liquidity in treasury bills and other naira-denominated securities, a development that could shape banks’ investment decisions, funding strategies and capacity to support private-sector lending.

The Federal Government has acknowledged concerns among investors about liquidity in treasury bills and the broader domestic debt market, signalling plans to work with monetary authorities to improve price discovery and make it easier for investors to exit naira-denominated investments without taking on additional risks.

Taiwo Oyedele, minister of finance and coordinating minister of the economy, disclosed this while responding to investors’ concerns during a briefing at the just concluded International Monetary Fund (IMF) and World Bank Group Annual Meetings in Bangkok, Thailand.

“One is around liquidity for T-bills, and more broadly, generally, liquidity to allow price discovery, and this is something we’re working on already, of course, along with the monetary authorities, to ensure that you can exit naira paper without any additional risk,” Oyedele said.

His remarks highlight a structural issue in Nigeria’s financial markets, where the ability to buy government securities at primary auctions does not necessarily guarantee that investors can sell those instruments easily in the secondary market when they need cash.

For banks, which hold government securities as part of their investment portfolios and liquidity management strategies, the depth and efficiency of the secondary market are important to managing cash flows, meeting obligations and determining the risks associated with their holdings.

The issue has assumed greater significance following the Central Bank of Nigeria’s decision in September to reduce the monetary policy rate by 350 basis points, from 26.50 percent to 23 percent, as policymakers seek to balance the need to support economic activity with efforts to sustain the decline in inflation.

As interest rates adjust to the new monetary policy stance, the government’s ability to improve trading conditions in its securities market could influence how banks and other investors allocate funds between treasury bills, other fixed-income instruments and lending to businesses.

Why liquidity matters to banks

Treasury bills are short-term debt instruments issued by the Federal Government to raise funds, manage its financing needs and refinance maturing obligations. Banks, pension funds, asset managers and other investors buy the instruments at auctions and may subsequently trade them in the secondary market.

For banks, treasury bills serve several purposes. They provide interest income, offer an avenue for investing funds and can form part of the assets used to manage liquidity and meet financial obligations.

However, the usefulness of these instruments depends partly on whether banks can convert them into cash when required without suffering significant losses.

A market with sufficient buyers and sellers allows investors to sell securities at prices that reasonably reflect prevailing market conditions. Where trading is limited, investors may struggle to find buyers at the prices they expect, particularly when interest rates change sharply or market sentiment weakens.

This can complicate banks’ treasury operations, especially when they need to meet customer withdrawals, settle transactions or respond to unexpected funding requirements.

Liquidity also affects the pricing of government securities. When investors can trade instruments efficiently, market prices and yields can respond more readily to changes in interest rates, investor demand and expectations about government borrowing.

Where trading is thin, prices may not accurately reflect changing market conditions, making it harder for investors to determine the value of their holdings and assess the returns required to compensate for risk.

Oyedele’s comments therefore point to the importance of developing a domestic debt market in which investors can enter and exit positions with greater certainty.

Read also: Treasury Bills or a money market fund? Do the arithmetic first

Secondary market trading remains central to price discovery

The government’s concerns extend beyond the amount of money investors commit at treasury bill auctions to what happens after the securities have been allotted.

Primary market auctions enable the Debt Management Office, acting on behalf of the Federal Government, to raise funds from investors. The secondary market allows investors to buy and sell securities already issued.

Both markets serve different but complementary functions.

A strong primary market enables the government to finance its borrowing requirements, while an active secondary market provides investors with flexibility and helps establish prices that reflect prevailing supply, demand and interest-rate expectations.

Without sufficient secondary market activity, investors may demand higher returns to compensate for the difficulty of selling their holdings before maturity.

For banks, this could influence the attractiveness of treasury bills relative to other assets, particularly when they must balance investment returns against the need to maintain sufficient liquid resources.

Improving liquidity could help reduce some of these frictions by making securities easier to trade and strengthening the process through which market prices are established.

However, better liquidity would not eliminate investment risk. Treasury bill prices can still change when market interest rates move, and investors selling before maturity may incur losses depending on the price at which they transact.

The challenge for policymakers is therefore to improve market depth and transparency while ensuring that investors understand the risks associated with holding and trading government securities.

Monetary easing adds to the importance of market liquidity

The government’s push for better liquidity comes as Nigeria adjusts to a lower policy rate following the CBN’s September monetary policy decision.

The 350-basis-point reduction in the monetary policy rate marked a significant shift in the direction of policy after an extended period of high interest rates intended to contain inflation and support macroeconomic stability.

The implications extend to the treasury bill market, where yields respond to monetary policy expectations, system liquidity, government borrowing requirements and investor demand.

As interest rates decline, the returns available on newly issued securities may adjust, influencing the investment decisions of banks and other institutional investors.

The pace and extent of that adjustment, however, depend on market conditions rather than the policy rate alone.

Liquidity conditions can affect the amount of money available for investment, the level of demand at auctions and the yields investors require to hold government securities.

For instance, where liquidity is tight, banks and other investors may have less money available to commit to new securities, even when the instruments offer attractive returns. Where liquidity is ample, demand may strengthen, although investors will still consider competing investment opportunities and prevailing risks.

Recent market activity illustrates the interaction between monetary policy, liquidity and government securities.

According to the Financial Markets Dealers Association’s analysis of the October 7, 2026 treasury bill auction, total subscriptions fell to N1.77 trillion from N4.23 trillion at the previous auction on September 23.

The association attributed the moderation in demand partly to tighter system liquidity and the relatively attractive returns available on the CBN’s Open Market Operations instruments.

The treasury bill auction offered N900 billion across the 91-day, 182-day and 364-day maturities, while subscriptions were concentrated in the one-year instrument.

The outcome illustrates how the availability of liquidity and the relative attractiveness of competing instruments can influence investor participation, even as monetary policy moves towards easing.

For banks, these dynamics matter because decisions about treasury bills cannot be separated from the wider liquidity environment, expected returns and the need to manage funding obligations.

Read also: Treasury bill demand falls 58% as OMO offers higher yields

Government borrowing and banks’ investment decisions

Improving liquidity in the domestic debt market could also influence the relationship between government borrowing and banks’ allocation of funds.

Government securities provide banks with an investment option that differs from lending to businesses and households. While treasury bills carry their own market and interest-rate risks, lending to private-sector borrowers involves additional considerations, including creditworthiness, repayment capacity, collateral and the possibility of default.

Consequently, changes in treasury bill yields do not automatically translate into higher bank lending to the private sector.

Banks will continue to compare the returns available from government securities with the risks and costs of extending credit to businesses.

Nevertheless, a more liquid and transparent government securities market could help banks manage their investment portfolios more efficiently, giving them greater flexibility in adjusting their positions as economic and monetary conditions change.

It could also strengthen price discovery, enabling banks and other investors to assess the relative returns available across different instruments.

For the government, a deeper secondary market could improve investor confidence and support more orderly pricing of domestic debt. The extent to which this translates into lower borrowing costs would depend on other factors, including inflation expectations, fiscal financing needs, market liquidity and the volume of securities issued.

The government’s borrowing calendar is also important because investors need sufficient information about issuance volumes and timing to plan their portfolios.

During the Bangkok briefing, Patience Oniha, director-general of the Debt Management Office, explained that the government’s fourth-quarter bond issuance calendar combined refinancing of maturing obligations with new borrowing.

She said the DMO monitors market conditions, interest rates and investor demand when determining its borrowing activities.

The explanation underscores the relationship between predictable issuance, market demand and the government’s financing requirements.

For banks and other institutional investors, clearer issuance plans can improve investment planning. However, predictability alone cannot guarantee that securities will be easy to trade after issuance.

What better liquidity could mean for monetary policy transmission

The treasury bill market is also important to the effectiveness of monetary policy.

When the CBN changes its policy rate, the impact is expected to spread through money market rates and other financial instruments, eventually influencing the cost of credit and returns on savings.

Treasury bill yields are among the market indicators through which investors assess the implications of policy decisions for short-term interest rates.

However, the relationship is not always immediate or uniform. Liquidity conditions, government borrowing requirements, investor expectations and the availability of alternative instruments can affect how yields respond to changes in the policy rate.

A well-functioning secondary market can help market prices adjust more efficiently as new information emerges.

For banks, this improves the information available when making decisions about asset allocation, funding and the pricing of financial products.

It can also help policymakers assess whether changes in the policy rate are being reflected in broader financial conditions.

The IMF has previously identified uneven monetary policy transmission in Nigeria, noting that the pass-through from policy rates to wholesale market rates has been stronger than the response of retail deposit rates. Its 2026 analysis also highlighted the importance of aligning liquidity management operations with the monetary policy stance.

This suggests that reducing the policy rate is only one part of the process. The structure and functioning of financial markets also influence how monetary decisions affect businesses, households and banks.

For Nigeria, improving treasury bill liquidity could therefore complement broader efforts to make the monetary policy framework more effective.

Regulatory clarity remains another concern

Beyond market liquidity, Oyedele identified uncertainty over the taxation of treasury bills, OMO bills and government bonds as another issue raised by investors.

He said the government could not guarantee that these instruments would be exempt from taxation but promised greater clarity to enable investors to price their investments appropriately.

The issue matters because investors assess the returns they will receive after accounting for taxes, transaction costs and other risks.

Uncertainty over tax treatment can complicate comparisons between instruments and make it harder for banks and other institutional investors to estimate their expected returns.

Greater clarity could improve investment planning and reduce uncertainty around the net returns available from government securities.

For banks, predictable rules are particularly relevant because treasury and investment decisions involve comparing returns across several instruments and managing risks within regulatory and liquidity requirements.

The government has also pledged to improve access to fiscal information and strengthen communication about its policies. These efforts could complement measures to improve secondary market trading by giving investors a clearer picture of government financing plans and the conditions affecting the domestic debt market.

However, regulatory clarity and market liquidity address different problems. Clearer tax rules can reduce uncertainty, but they do not by themselves guarantee sufficient buyers and sellers or prevent prices from fluctuating.

The challenge ahead

Nigeria’s efforts to improve treasury bill liquidity come at a time when policymakers are seeking to lower inflation, reduce borrowing costs and encourage investment while maintaining financial stability.

For the banking sector, the outcome will depend partly on whether reforms produce a market where government securities can be traded efficiently, prices reflect prevailing conditions and investors can manage their holdings without unnecessary friction.

The government’s commitment to work with monetary authorities is an important signal, but implementation will determine how much the market benefits.

Investors will be watching for improvements in secondary market activity, clearer issuance information, more transparent pricing and greater certainty over the rules governing government securities.

For banks, these changes could strengthen liquidity management and improve investment decisions. They could also provide better market signals for determining the relative attractiveness of government securities and private-sector credit.

But the broader objective is not simply to make treasury bills easier to trade. It is to strengthen the financial market infrastructure through which government borrowing, monetary policy and private investment interact.

As Nigeria moves into a lower interest-rate environment, the depth and efficiency of its domestic debt market will remain an important test of whether the country’s financial reforms can deliver more predictable investment conditions and a stronger foundation for sustainable economic growth.