Does Interbank Funding Stress Predict Treasury Bill Yield Risk in Nigeria? Evidence from Volatility Persistence, Quantile Regression and Out-of-Sample Forecasts.

Abstract: Treasury bills carry no default risk in naira, but their yields can move sharply, and a holder who needs to sell before maturity bears that risk. A common view among market practitioners is that turbulence in the interbank market, where banks fund themselves overnight, spills over into the bill market. This paper tests that view with monthly Central Bank of Nigeria data for February 2006 to March 2026. The risk measure is the absolute monthly change in the Treasury bill rate, and the funding-stress measure is the absolute monthly change in the interbank call rate. Across 241 months, bill-yield risk is clearly persistent: a one-point absolute change this month is followed by a 0.31-point absolute change next month (HAC p = 0.004). Interbank movements add nothing. Their coefficient is close to zero and insignificant in ordinary least squares, before and after 2021, with or without policy-rate and inflation controls, and at the median, 75th and 90th percentiles in quantile regressions. Months with the largest interbank moves are followed, if anything, by slightly smaller bill-yield changes. Out of sample, over February 2021 to March 2026, adding interbank information does not improve forecasts, and none of the models beats the historical mean significantly. The paper also shows that the positive interbank effect suggested by the published data arises from two zero entries in the bill-rate series. In Nigeria, bill-yield risk is driven by the bill market’s own dynamics rather than by spillovers from overnight funding conditions.

Keywords: Treasury bills; funding liquidity; interest-rate risk; quantile regression; volatility; Nigeria

JEL classification: G12; G21; G17; C22