Barely a year after Ethiopia’s treasury bill market began attracting investors in numbers unseen in years, the government is finding itself in an increasingly favorable position: more money is chasing its short-term securities, while the price it pays to borrow keeps falling.
During an auction on August 5, investors (primarily commercial banks) bid a collective 116 billion Birr for the 40 billion Birr worth of T-bills on offer. The rush, where bids outpaced the amount on offer by nearly threefold, came despite another drop in yields.
The weighted-average accepted yield on the 28-day bill fell to 4.887 percent, while the 91-day and 182-day bills yielded 5.530 percent and 6.997 percent, respectively. Even the 364-day bill slipped slightly below 10 percent, according to National Bank of Ethiopia (NBE) auction data.
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Only a year earlier, investors were demanding considerably higher returns. At the July 23, 2025 auction, weighted-average accepted yields stood at 13.966 percent for 28-day bills, 14.407 percent for 91-day bills, 16.641 percent for 182-day bills and nearly 15 percent for 364-day securities, according to NBE data.
By July 22 this year, the corresponding yields had fallen to 5.502 percent, 7.659 percent, 8.806 percent and 11.142 percent, respectively.
Yet demand was accelerating. At the July 22 auction, bidders submitted bids valued at over 119 billion Birr for just 33.29 billion Birr in securities on offer, more than three-and-a-half times the available amount. The 91-day bill alone attracted close to 31 billion Birr in bids, while the 182-day bills pulled in a collective bid amount of nearly 35 billion Birr.
For a market that only a few years ago struggled to attract voluntary buyers, the reversal has been significant.
For much of the previous decade, the relationship between private banks and government securities was shaped heavily by regulation. In 2011, the NBE introduced what became known as the 27-percent rule, requiring private commercial banks to purchase five-year NBE bills equivalent to 27 percent of new loan disbursements.
The bills initially carried an interest rate of three percent. The arrangement tied up part of banks’ resources in low-return central bank securities and raised concerns over its effect on private-sector credit.
The IMF warned that the requirement could constrain private banks’ ability to extend credit. By 2018, it estimated that holdings of NBE bills were equivalent to up to 40 percent of private commercial banks’ outstanding loans, while the return on the bills remained negative in real terms.
That regime changed in November 2019, when the 27-percent requirement was abolished as part of financial-sector reforms. Competitive T-bill auctions followed in December 2019, marking a shift toward market-based government financing.
The transition, however, was not linear.
In November 2022, another mandatory government-security requirement was introduced. Commercial banks were instructed to allocate 20 percent of new loan disbursements to five-year Treasury bonds carrying a nine percent interest rate. A World Bank assessment later described the measure as an effective reversal of part of the earlier financial-sector reform.
Meanwhile, the competitive T-bill market continued to operate, but attracting investors remained a challenge. By late 2024, yields were rising as the government sought to draw more financing through the market. The IMF reported that the weighted-average T-bill yield rose from 12.6 percent in October to 14 percent in November 2024. Even then, the yield remained below the policy rate and negative after accounting for inflation.
The picture began to change in early 2025.
By February, the yield on the 364-day bill had climbed to 17.7 percent, from 15.9 percent at the end of December. The NBE said short-term market interest rates had turned positive in real terms for the first time.
By April, the weighted-average T-bill yield had reached 17.8 percent, above both inflation and the policy rate. More importantly, investors were showing up in greater numbers. The IMF reported that auction volumes rose considerably, with some auctions oversubscribed and an average bid-cover ratio of 143 percent for the month. It described the development as a breakthrough after several years of routinely undersubscribed auctions.
The shift away from compulsory government financing continued. On June 30, 2025, the NBE repealed the directive requiring commercial banks to purchase five-year Treasury bonds. The central bank said the change was possible because of improvements in government revenue generation and the government’s ability to cover its deficit-financing needs through concessional external loans and market-based domestic debt instruments.
A little over a year later, the problem confronting the T-bill market has almost been turned on its head. The government is no longer struggling to attract enough bids. Investors are offering several times the amount of securities available, even as the returns they are willing to accept have fallen sharply.
The figures establish the transformation. They do not, on their own, explain it.
What is sustaining demand as yields decline, who is putting up the money, and why commercial banks and other large institutional investors continue to compete for the bills at increasingly lower returns now sit at the center of Ethiopia’s changing government securities market.
Commercial banks have become the largest group of holders. The IMF’s Fifth Review of Ethiopia’s economic program, published in July, says banks held around 60 percent of outstanding T-bills as of the end of February 2026.
The composition had already shifted markedly by the middle of the previous year. At the end of June 2025, the Commercial Bank of Ethiopia (CBE) alone held 44 percent of outstanding T-bills, while other banks accounted for another 14 percent. Pension funds and insurance companies together held about 41 percent, according to IMF debt data.
The investor base has since begun widening beyond the institutions that traditionally dominated the market. Ethiopian Investment Holdings (EIH) entered the T-bill market in May 2025 with an initial seven billion Birr investment, adding another large institutional participant.
Sintayehu Mesele, senior associate and co-founder of Lumina Capital, an investment advisory firm licensed by the Ethiopian Capital Market Authority, sees the changing mix of investors as one of the defining features of the market’s evolution.
“Historically, the T-Bill market was dominated by government pension funds and the Commercial Bank of Ethiopia,” Sintayehu told noted. “However, following reforms in 2019, commercial banks, insurance companies, and private pension funds began participating in auctions.”
Despite the arrival of new participants, he says banks and pension institutions continue to dominate the market.
That makes the behavior of commercial banks particularly important to understanding the latest auctions. Why would institutions whose core business is lending continue putting large sums into government securities when the yields available on those securities have fallen so sharply?
A banking and capital-market professional involved in investor education, who requested anonymity, points first to the liquidity accumulated inside the banking system while credit growth was restricted.
“In my view, the strongest driver of the increase in Treasury bill demand has been the liquidity position of the banking system, particularly under the credit growth cap,” the professional told The Reporter Magazine. “When banks were constrained in expanding their loan books, they naturally had to look for alternative ways of deploying excess liquidity.”
The attraction, the professional argues, was not necessarily the prospect of maximizing returns.
“For banks, it was not necessarily about locking money away for a long period or maximizing yield; it was often a practical liquidity-management decision, essentially a way of putting surplus cash to work temporarily while keeping the ability to recover that liquidity relatively quickly.”
That distinction also helps explain why falling yields have not been accompanied by a collapse in demand.
“There is actually no contradiction between strong demand and falling yields once we look at what was driving that demand,” the professional said. “In a competitive auction, when a large amount of liquidity is chasing a relatively limited amount of securities, investors compete by accepting lower yields. In other words, the oversubscription itself can become part of the mechanism that pushes yields down.”
Sintayehu also points to excess liquidity, but places it alongside the investment policies of large institutions.
“Much of this is driven by the internal investment policies of large institutions,” he said. “Furthermore, banks are managing excess liquidity, and T-Bills provide a market-based alternative to the previous mandatory five-year bond purchases.”
The comparison between T-bills and ordinary lending is also less straightforward than their respective interest rates might suggest.
“A Treasury bill is a short-term government instrument whose appeal is primarily its security and liquidity, rather than simply its headline yield,” the anonymous professional said. “A commercial loan, on the other hand, involves credit risk, monitoring costs, capital allocation, relationship considerations and usually a much longer and less predictable deployment of funds.”
Nor are the two uses of money necessarily mutually exclusive.
“In practice, a bank can even use Treasury bills as part of its liquidity-management process while preparing to lend,” the professional said. “For example, if a bank has funds that it expects to deploy into a private-sector loan but the loan approval and disbursement process will take some time, it can temporarily place those funds in a short-term Treasury bill rather than leaving them idle.”
“The more meaningful comparison is therefore not simply ‘T-bill yield versus lending rate,’” the professional said. “Banks will compare the risk-adjusted return and liquidity characteristics of the two uses of funds.”
The credit cap therefore emerges as an important part of the explanation, but not necessarily the whole explanation.
“The market reforms created the vehicle, while the credit cap significantly increased the amount of liquidity looking for that vehicle,” the professional said.
That distinction has become particularly important since the NBE removed the broad credit growth cap in July 2026, nearly three years after it was first introduced. The cap was first applied in mid-2023, with the NBE seeking to contain skyrocketing inflation rates by limiting commercial banks’ annual credit growth to 14 percent. In December 2024, the threshold was loosened to 18 percent, and then again to 24 percent in September 2025.
Today, banks once again have greater room to expand lending, raising the question of whether some of the liquidity that flowed into T-bills will gradually find its way back into private-sector credit.
The first auctions following the policy change nevertheless remained heavily oversubscribed. But the professional cautions against reading too much into the immediate results.
“I would be cautious about drawing a strong conclusion from the first auction after the removal of the credit cap. One auction is simply too early to establish a trend,” the professional said. “Banks are still adjusting to the new operating environment. The removal of the cap does not mean that credit suddenly expands overnight.”
The coming months may provide a clearer test. The banking and capital-market professional said the strongest evidence of liquidity shifting away from government securities would be private-sector credit accelerating at the same time that banks’ T-bill accumulation moderates and yields begin to stabilize or rise.
For now, the market remains concentrated despite its widening investor base. Sintayehu describes the shift toward competitive auctions as a major advance, but stops short of describing the market as fully developed.
“The transition to a market-based system is a massive step, though it is not yet ‘fully functional’ because it is still dominated by a few large institutions,” he said. “As the investor base broadens beyond government-linked entities, we will see a more authentic market where prices are determined by diverse participants.”
The concentration of demand among large institutions extends beyond commercial banks. For pension administrators, the appeal of government securities is tied not only to returns, but also to the need to protect funds and maintain enough liquidity to meet their obligations.
About five months ago, in an interview with The Reporter Magazine, Abate Mitiku, chief executive of the Private Organizations Employees’ Social Security Administration, said approximately 98 percent of the administration’s portfolio was invested in Treasury bills and government bonds.
“Maintaining sufficient liquidity is essential,” Abate said, explaining that pension administrators must ensure beneficiaries receive their payments without interruption.
He also described T-bills and government bonds as virtually risk-free investments, reflecting the priority the institution places on safeguarding pensioners’ money.
Beyond such large institutional investors, however, participation remains limited.
Sintayehu says individual and corporate investors remain less prominent than banks, pension funds and other institutional buyers, partly because Ethiopia’s securities market is still young.
“It is still early days; the market has only been open to a broader range of investors for about a year,” he said. “Several factors are at play: the infrastructure, such as the Ethiopia Securities Exchange (ESX) platform, is not yet fully operational, and there is a general lack of awareness among retail and corporate investors.”
Falling yields may add another consideration for prospective retail investors. Sintayehu says current yields are often viewed as less attractive by individuals who believe they can find better returns elsewhere.
Changes now underway could nevertheless make the market accessible to a wider range of investors.
According to the IMF’s July review, authorities have signaled that an over-the-counter facility for secondary trading of T-bills will be established by the Ethiopian Securities Exchange by September 2026. Direct retail access to government securities through the central securities depository is also planned by the end of December 2026.
Collective Investment Schemes (CIS) could provide another route into the market. Sintayehu sees their development, alongside secondary trading, as potentially important for widening participation.
“Two things will be game-changers,” he said. “First, Collective Investment Schemes, which are currently in the final legal stages with the Ministry of Justice. These will allow retail and institutional investors to buy into diversified pools of securities like commercial paper and T-Bills.”
The second, he says, is the ability to sell a T-bill before it reaches maturity.
“Currently, if you buy a 364-day T-Bill, your money is locked until maturity,” Sintayehu said. “Secondary trading will allow investors to sell their holdings whenever they need liquidity, which will significantly boost investor confidence.”
The banking and capital-market professional also sees a broader institutional base as important to the market’s development, particularly through professional asset managers and pooled investment vehicles that could connect smaller savers to government securities.
“Ultimately, the goal should not simply be to get more people buying Treasury bills,” the professional said.
The professional argues that a deeper market would instead involve different types of investors participating for different purposes, reducing dependence on a relatively small number of institutions with large pools of liquidity.
The question facing the market has therefore changed. It is no longer simply whether the government can find buyers for its short-term debt. It is whether today’s rush can develop into a broader and more liquid market capable of sustaining voluntary demand as the conditions that helped produce it continue to change.
