Treasury Bills vs. Equity Portfolio Allocation in Current Monetary Environment
This review is a response to a subscriber’s enquiry. It evaluates competing investment strategies against Nigeria’s complex monetary policy landscape. While Treasury Bills offer attractive nominal rates (21% gross, 19% net), the Central Bank’s decision to maintain elevated rates despite falling inflation reveals underlying stability concerns that warrant defensive positioning.
The analyst recommendation is to lock in 21% TB rates now and defer equity allocation until monetary policy clarity emerges (Q2 2025 earliest). Find below the rationale for this position. We welcome your feedback and insights via ceo@proshare.co
The Question We Sought To Answer
The fundamental investment question That was raised to our Chief Economist was:
“Whether to pursue a 70% equity / 25% Treasury Bill / 5% cash allocation or adopt a more defensive posture given current Nigerian monetary dynamics.”
The core issue centers on a critical policy contradiction, i.e. why the Monetary Policy Committee (MCP) maintains elevated rates (MPR at restrictive levels) despite headline inflation showing moderation toward single digits.
This dissonance between observable inflation trends and central bank behavior reveals information asymmetry that investors ignore at their peril.
CBN’s reluctance to cut rates signals either skepticism about inflation data durability (see Proshare and Rencap’s recent report on Data Integrity) or prioritisation of other policy objectives, most notably protecting $25 billion in record portfolio investment inflows that depend on maintaining attractive interest rate differentials.
Analyst View on Why CBN Isn’t Cutting Rates
1. The Portfolio Investment Stability Imperative
From a risk assessment lens, the CBN is protecting $25 billion in portfolio flows. This represents the largest foreign investment position in Nigerian financial assets in recent history. The dynamics are critical, as portfolio investors entered Nigerian assets (primarily fixed income) attracted by the carry trade: borrowing in low-rate currencies (USD at ~5%, EUR at ~4%) and investing in naira assets yielding 20%+. This arbitrage depends entirely on exchange rate stability and interest rate maintenance.
If the MPC cuts rates aggressively (say, 400-600 basis points to align with moderating inflation), it triggers two immediate consequences:
- Narrowing carry spread makes Nigerian assets less attractive relative to other emerging markets (Kenya at 12.75%, Egypt at 27.25%, South Africa at 7.75%), and
- Signals potential policy instability, prompting defensive exits by portfolio managers operating on quarterly performance cycles.
We posit that the CBN cannot risk a sudden $25 billion outflow. At current reserves levels (~$40 billion), this would create catastrophic exchange rate pressure and potentially undo two years of stabilization efforts.
2. The Inflation Skepticism Question
Again, from a risk management lens, the right question to ask is: does the MPC trust the inflation numbers?
Nigeria’s inflation calculation methodology has faced credibility challenges, some of which we captured in our recent January 2026 commentaries – Nigeria’s Inflation Rate in December 2025: Technical Options and Matters Arising, Nigeria’s Inflation Eases to 15.15% in December 2025 Based on Revised Calculation, and Setting the Record Straight: Resolving NBS’s CPI Base Rate Question in Nigeria’s December 2025 Inflation.
The MPC likely recognizes that recent headline inflation moderation may reflect transitory factors (base effects, harvest season impacts, temporary naira stability) rather than durable disinflationary trends. Cutting rates prematurely based on potentially misleading signals could reignite inflation expectations, a mistake the CBN cannot afford after the credibility damage from previous policy inconsistency.
3. Election Liquidity Concerns
The anticipated ₦1.2 trillion election spending represents 10% of M3. While most risk management models correctly note this is already ‘captured’ in current money supply figures, the concern isn’t the stock, it’s the velocity.
Election cycles systematically increase money velocity as dormant deposits (including the 40% in FX accounts) get mobilized. This creates temporary demand-pull pressure and exchange rate volatility. The CBN’s rate maintenance is a pre-emptive sterilization strategy: high TB rates provide an absorption mechanism for this activated liquidity, preventing it from immediately translating into inflation or FX pressure.
Why Lock in 21% TB Rates Now
The case for maximizing TB allocation is compelling. The recommended strategy strongly favors locking in current 21% Treasury Bill rates (19% net) rather than pursuing equity concentration at this juncture. An 85% TB / 10% gold / 5% cash allocation provides exceptional absolute returns by global standards while eliminating market timing risk and equity volatility exposure.
If inflation moderates to single digits as projected, real returns will reach 10-11%; extraordinary for risk-free instruments. Even under less optimistic scenarios where inflation stabilizes at 12-13%, investors capture 6-7% real returns with zero principal risk.
The Treasury Bill (TB) ladder structure (quarterly maturities) preserves optionality, allowing redeployment into equities once monetary policy clarity emerges, likely Q2-Q3 2025 at earliest. See Ahead of Next T- Bills Auction Scheduled for January 21st, 2026.
The equity allocation deferral is predicated on identifiable risks in the proposed 70% equity concentration. Nigerian equity markets demonstrate high correlation with portfolio investor sentiment, if the $25 billion PFI position faces redemption pressure from global risk-off dynamics or domestic policy uncertainty, equity markets would experience synchronized selling alongside fixed income.
Current market depth constraints mean investors cannot deploy substantial capital or exit positions efficiently during stress periods, precisely when rebalancing becomes critical.
Furthermore, the asymmetric payoff structure favors defensive positioning: while the bull case might deliver 25-35% equity returns, the bear case (PFI exodus, policy reversal, inflation resurgence) could generate 40-50% losses. Against guaranteed 19% TB returns, the risk-adjusted expected value doesn’t justify 70% equity concentration given prevailing uncertainty levels.
Equity allocation should commence only after satisfying specific conditions: MPC implementing minimum 200 basis points of rate cuts without triggering portfolio outflows; inflation demonstrating sustained three-month moderation trend; post-election liquidity absorption evidenced by normalized M3 velocity (as Tilewa Adebajo’s CFG Advisory report raised observations on); maintained exchange rate stability with NAFEM volatility below 2% monthly; and equity valuations offering compelling risk premiums (minimum 800 basis points over prevailing TB rates).
Equity Entry Conditions (Earliest Q2-Q3 2025)
Analysts will consider equity allocation only when ALL of the following conditions are satisfied:
- MPC implements at least 200 basis points of rate cuts without triggering PFI outflows (monitor monthly CBN data on portfolio investment positions).
- Inflation demonstrates sustained moderation for three consecutive months (not just volatility-driven monthly fluctuations).
- Post-election liquidity absorption is evident (M3 velocity normalizes, money market rates stabilize).
- Exchange rate stability is maintained (NAFEM rate volatility below 2% monthly).
- Equity valuations offer compelling risk-adjusted returns versus prevailing TB rates (minimum 800 basis points premium to compensate for equity volatility).
If these conditions materialize, a gradual equity allocation (beginning with 15-20%, not 70%) would be appropriate, sourced from maturing TB proceeds.
The investment philosophy prioritizes avoiding catastrophic losses while maintaining exposure to positive outcomes rather than maximizing returns across all scenarios. When monetary authorities demonstrate policy caution despite ostensibly favorable data, disciplined investors choose certainty over speculation, securing exceptional risk-free returns while preserving capital and optionality for validated future opportunities.Copied from Proshare Research
