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Nigeria’s fixed income yields are trending lower, despite elevated inflation, which is leading to a widening of negative real returns and financial repression.
Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction.
The overall policy actions result in the government being able to borrow at extremely low interest rates, obtaining low-cost funding for government expenditures. Savers and Investors including, Pension Funds for retirees are therefore making negative returns on their investments.
Interbank liquidity remained the significant determinant of treasury yield direction, which was fueled by the removal of caps and floors on interbank placements.
Data from the CBN showed that the system liquidity stood at NGN540.21bn as of July 19, up from NGN382.73bn as of the last MPC meeting date.
Additionally, the Overnight Policy Rate and Overnight Rate have been very volatile during the period, crashing to a year-low of 0.83% and 1.15% on July 5 (from 11.00% and 11.50% as of May 23), respectively.
There has been a weak relationship between the Monetary Policy Rate (MPR) and treasury yields as the transmission mechanism remain weak.
Analysts say this, combined with the robust system of liquidity, has continued to broaden the gap between inflation rate and treasury yields, leading to a widening of negative real returns.
The Nigeria’s inflation rose to 22.79% for the month of June, according to latest report released by the National Bureau of Statistics (NBS).
The headline inflation rate rose to 22.79% from 22.41% in May 2023 on account of higher food prices.
At the last T-bills auction, the stop rate on the 91-Day, 182-Day, and 364-Day instruments were 2.86%, 3.50%, and 5.94% (vs 4.50%, 6.44%, and 8.99% as of May 23).
Equally, the average marginal rate in the bond primary market declined to 13.63% in July (vs 15.12% in May).
A similar trend was observed in the secondary market as average T-bills and bond yield fell by 285bps and 125bps to 3.80% and 12.75% as of July 19, respectively.
“While lower treasury rates can be seen as a positive for the Federal Government in a bid to improve the nation’s fiscal sustainability, we note that the adverse impact of the rising inflationary pressure continues to taper investors’ real return,” analysts at Meristem Securities said.
According to the International Monetary Fund (IMF), policies that promote financial repression may include directed lending to the government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy “moral suasion.”
Financial repression is also sometimes associated with relatively high reserve requirements (or liquidity requirements).