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Tuesday, March 21, 2023

Nigeria Bond Yields Climb to Four Months High as Investors Eye Inflation

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Nigerian government bond yields surged to the highest in four months at a primary bond auction as investors eyed growing inflation expectations amid an increase in borrowing to fund wider deficits.

Yields on benchmark 15-Year securities due 2035 rose to 8.74 percent at a government auction held Wednesday (Jan 20), up 170 basis points compared to the last auction in December, to trade around the highest level in about four months, according to data compiled by MoneyCentral.

The Benchmark 25-year bonds due 2045 sold at a marginal rate of 8.95 percent up some 195 basis points from the last auction in December, according to data from the Debt Management Office (DMO).

The last time yields were this high at a primary auction was in September 2020, when the DMO allotted just N6.81 billion of the N40 billion on offer to investors for the 25-year paper at 8.9 percent and N25.43 billion of the N40 billion on offer for the 15-year paper at 8.52 percent, according to data compiled by MoneyCentral.

Rising Inflation

Yields are rising as Nigeria’s headline inflation rose to 15.75 percent in December 2020, the highest since November 2017. Meanwhile optimistic revenue assumptions in its 2021 budget means issuance is to remain near record highs for a long time to come.

MoneyCentral analysis of the budget documents show that the Federal Government expects 2021 revenues to be 108 percent higher than the actual 2020 revenues, despite 2020 actual received revenues underperforming projections by 27 percent.

Overall the 2021 budget deficit is equivalent to N5.60 trillion representing 3.93 percent of GDP. The budget deficit is to be financed mainly by borrowings.

Foreign Investors on Sidelines

Investors put in a total of 99 bids worth N106.37 billion for the 15-year paper this week, compared to 67 bids worth N90.89 billion at the December auction for the same tenor. A total of N146.44 billion in bids were placed across the 2 tenors (15-year and 25-year) at the January auction, compared to N134 billion in December.

While investor demand has grown in the run-up to the DMO auction, the action has largely been from domestic institutional investors and Pension Funds as foreign investors remain on the sidelines, put off by bond yields still ways below inflation.

“High inflation, low bond yields and non-smooth functioning of the foreign exchange market means foreign portfolio investors won’t come back in a big way. There will need to be an adjustment to the current low interest rate environment,” said Razia Khan, Africa economist at Standard Chartered Bank.

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