Nigeria’s yield curve is set to marginally steepen this year, with real yields remaining firmly in negative territory, despite gradually growing inflation expectations.
“We forecast the yield curve to compress further by 57 basis points across maturities in Q1 2021, and expand by 200 (bps) by the end of 2021,” said analysts at United Capital in a note to clients.
In other words, demand for short term bills is expected to persist while investors continue to systematically exit long dated bonds. In finance, the yield curve is a curve showing several yields to maturity or interest rates across different contract lengths for a similar debt contract.
The slope of the yield curve gives an idea of future interest rate changes and economic activity.
The yield on fixed income securities in Nigeria tumbled to record lows across all maturities in 2020, despite elevated macroeconomic fragilities aided by the global spread of Covid-19.
Record low yields were triggered by the CBN’s earlier decision to bar locals from the OMO market and amplified by elevated system liquidity (driven by huge net OMO inflows) as well as policy rate cuts in response to the economic recession.
Average yields contracted by 485 bps to 5.1 percent (with 90-day NTB yield crashing to a low of 0.10%) as of 31 Dec- 2020 from 10.0 percent in 31 Dec-2019.
Contrary to the last recession in 2016, where the CBN took a hawkish stance, the Apex Bank adopted a dovish approach in 2020 in a bid to salvage the economy.
“Considering the MPC’s decision to hold all monetary parameters constant in the first meeting of the year, we do not anticipate a sharp reversal in the near term,” United Capital analysts said.
While the yield environment in Nigeria for 2021 will be shaped by a lot of factors, including system liquidity dynamics, monetary policy guidance, and FG’s 2021 borrowing program, the major factor remains the CBN’s willingness (or not) to unwind the low interest rates it has engineered.
“The CBN intends to see policy pronouncements to its full course and we will not see immediate reversal of low interest rates in the short to medium term,” Chief Executive Officer, Oscar Onyema said last week at a 2021 economic outlook conference held by the Nigerian Stock Exchange (NSE).