Negative Yields: Foreign Investors Maintain Distance from Nigeria's Bond Market
Patience Oniha, DMO Boss

Negative Yields: Foreign Investors Maintain Distance from Nigeria’s Bond Market

Nigerian institutional investors’ position in the bond market has remained active as Foreign Portfolio Investors (FPIs) maintained a distance over negative interest rates earned on government borrowing instruments in the capital market.

At the recent bonds auction, spot rates on government fell, widening negative interest rates on fixed income instruments. Analysts said the interest rates payments on Nigerian government instruments are unattractive following inflation surge and outlook for the year versus government borrowing rates.

In its latest pension report, the commission said pension assets spiked to N15.58 trillion. The report showed that more than 65% of the pension asset was invested in Federal Government Securities at the end of March 2023.

Both local and foreign investors believe the market remains attractive as Nigeria’s inflation rate continues to race ahead of real return on investment, thus, exposing the value of the investment portfolio.

After CBN floated the local currency, nothing changed in the bond market. It was noted that domestic institutions and local investors remain dominant players in the debt capital market.

Despite the absence of foreign investors the Nigerian bonds auction, total subscriptions jerked up, pension assets maintain activities position amidst a dearth of alternative investment options.

The subscription level expanded by 32.8% to N635.12 billion, translating to a bid-to-offer ratio of 1.8x, a significant jump when compared with a bid-to-offer ratio of 1.3x at last month’s auction. The previous month’s auction recorded a total of N478.9 billion in subscriptions.

Meanwhile, results showed that though DMO offered N360 billion worth of FGN Bonds for sale to investors, the agency eventually raised N427.2.2 billion through the re-opening of its old and new bonds.

The stop rate for the re-opened 2029 FGN bonds fell to 13.90% from 14.60%, while the new Issues were done at their coupon rates of 14.70%, 15.45%, and 15.70%, respectively. >> Nigerian Treasury Bills Yield Rises to 7%

Rates on these government bonds were currently below the headline inflation rate of 22.41% reported by the National Bureau of Statistics for the month of May 2023, thus, exposing asset managers’ portfolios to value decline in real terms.

In a report, Coronation Research revealed that Nigeria exceeded its borrowing target by 20% on a pro-rata basis as the debt office has now raised a total sum of N2.9 trillion from the beginning of the year to date.

Nigeria’s debt office had earlier revised its FGN bonds issuance calendar for June 2023 to show the planned issuance of three new instruments – FGN JUN 2033 (10-year), FGN JUN 2038 (15-year), and FGN JUN 2053 (30-year) bonds.

This is in addition to the reopening of the 5-year FGN bond. DMO plans to raise N2.4 trillion, but the record shows that the agency has raised N2.9 trillion year to date, beating its own target by 20%

“The demand at this auction primarily reflects improved system liquidity on the back of cash reserve ration (CRR) refunds to banks and recent maturities from treasury bills instruments which outweighed outflows for T-bills, fx auctions”, Coronation Research stated.

According to analysts, demand has been supported by healthy liquidity in the financial system.

The liquidity condition has been helping the Nigerian government to maintain stable funding rates on local borrowings, below the headline inflation rate, resulting in negative interest rates for investors. #Negative Yields: Foreign Investors Maintain Distance from Nigeria’s Bond Market