Why Nigerian Bonds are Worst Performers in Africa

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FGN Bonds

Nigerian bonds are the worst performers in Africa on a year to date basis, according to the latest data from Standard and Poor’s from its various Africa Sovereign bond indices.

Nigerian bonds returned -18.82 percent as at last week. This compares to -2.69 percent for South African bonds, -2.11 percent for Mauritius bonds and -2.01 percent for Botswana bonds.

Why are Nigerian bond returns so poor?

Rising bond yields

Bond yields have risen this year in Africa’s largest economy, leading to a fall in prices as inflation accelerates.

There is an inverse relationship between bond yields and prices, meaning that as yields rise prices fall.

Higher inflation

Nigerian inflation touched a high of 18.17 percent in March 2021, as food prices surged.

Inflation is a bond’s worst enemy. Put simply, the higher the current rate of inflation and the higher the (expected) future rates of inflation, the higher the yields will rise across the yield curve, as investors will demand this higher yield to compensate for inflation risk.

This is again negative for bond prices as noted earlier.

CBN seeks to normalize rates

The impact of the Central Bank of Nigeria’s (CBN) OMO regulation that restricted participation of non-bank corporates from open market operations (OMO) transactions is gradually fading out as the apex bank seeks to normalize rates and yields recover across segments of the fixed income market.

Naira devaluation

The Nigerian currency the naira has weakened this year against the dollar making returns on bond returns to be lower in dollar terms.

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