PFAs Ramp Up Bonds as Negative Real Return Declines
Patience Oniha, DMO Boss

Pension Fund Administrators (PFAs) have bolstered their government bond holdings amidst a shrinking negative real interest rate. The bond market has continued to see increased demand from authorised dealers and pension fund administrators following changing market dynamics.

The inflation rate in Nigeria has turned dirty, breaching a multi-year high despite sustained monetary policy tightening in Africa’s largest economy by size. The monetary authority has tightened local deposit money banks’ ability to create credits, though it still expects 65% of the aggregate deposit to be given out as loans.

As a result of weak macroeconomic indicators and rising loan default rates, banks have been encouraged by the higher interest rate to invest more in government securities. The monetary authority has increased interest rates several times since May in an effort to combat inflation.

However, the consumer price index continues to worsen due to the ineffectiveness of interest rate adjustments on a key driver of price instability – costs. The statistics office reported that the headline inflation rate surged to 31.70% in February, and Broadstreet analysts’ consensus remains that consumer inflation will rise further in March 2024.

In a fast and furious manner, the Central Bank of Nigeria (CBN) policy committee increased benchmark interest by 6% in less than 2 months as fight against inflation got dirty. The contractionary stance has lifted the interest rate to 24.75%, thus forcing yield repricing in the fixed income market.

Institutional investors and pension fund administrators parked large funds in government bills, a move that analysts said was supported by elevated yield on naira assets. According to the latest monthly report by the National Pension Commission (PENCOM), FGN bonds held by pension fund administrators increased by 27.5% year on year to N11.6 trillion in January from N9.1 trillion recorded in the corresponding period of 2023.

The PENCOM report shows that FGN bonds accounted for 59.4% of total assets under management (AUM).

“We expect to see another uptick when the NBS releases its March inflation figure. Our view is partly hinged on structural issues impacting the cost of doing business, such as insecurity, supply chain issues, and epileptic power supply, among others,” Coronation Research said in an update.

Analysts at the firm anticipate continuous monetary policy tightening, given elevated inflation levels and the CBN’s desire to reduce negative real interest rates and attract foreign portfolio investors. The Nigerian government has raised N2.5 trillion from the sale of FGN bonds from the beginning of the year to date, Coronation Research stated in its update.

Analysts do, however, anticipate an increase in FGN bond yields in the secondary market given the magnitude of the FGN’s borrowing plans for 2024—N6.1 trillion from internal and N1.8 trillion from external sources.

“We currently see yields at the mid-curve around 18.3%–22.0% and between 18.6% – 22.0% at the longer end of the curve over the next month,” the firm projected. #PFAs Ramp Up Bonds as Negative Real Return Declines

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