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Nigeria Pension Funds Reallocate Assets as Entire Yield Curve Falls Below Inflation

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Nigeria Pension Funds boosted holdings of longer dated Federal Government of Nigeria (FGN) bonds as the entire yield curve fell below inflation.

In finance, the yield curve is a graph showing several yields to maturity or interest rates across tenors. A yield curve is a way to measure bond investors’ feelings about risk, and can have a tremendous impact on the returns Nigerians receive on their investments.

Pension Funds exposure to FGN bonds increased to 55.4 percent of their total assets under management (AUM) in the year through May 31 2020, up from 49 percent a year earlier.

Pension Funds are increasing their exposure to long dated bonds as yields on Treasury Bills with maturities of one year or less, collapsed in the past year on the back of Central Bank of Nigeria (CBN) policies to increase banks’ lending to the real sector.

Total treasury bill holdings for Nigeria Pension Funds fell by 43 percent to N1.1 trillion in May 2020, from the year ago figure of N1.96 trillion data from the regulator Pencom shows.

As a percentage of total pension assets Treasury bill holdings fell to 10.3 percent from 21.3 percent a year ago.

The asset reallocation is probably a positive for an industry that has to match long-term liabilities to longer term assets.

Nigeria’s yield curve which was inverted a year ago has become upwards sloping helping to fuel the move into long term bonds by Pension Funds.

Yields on 12-month Treasury Bills traded at 2.95 percent yesterday according to data from the FMDQ. Benchmark Nigeria FGN bonds due 2030, yielded 9.08 percent the data shows.

The entire Nigerian yield curve is however currently below inflation (which printed at 12.56 percent in June), which is a worry for Pension funds ability to generate real returns for retirees and contributors.

While Treasury Bills fell out of favor with Nigerian Pension funds, the share of local money market securities in their portfolio increased to 14.71 percent of AuM from 10.99 percent a year ago, data seen by MoneyCentral shows.

Parking funds in the short-end of the market had been a popular strategy with many Nigerian Pension fund managers in the past, however the economic uncertainty and collapse in yields has led them to reexamine their strategies.

 

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