• Friday, March 29, 2024
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BusinessDay

Nigeria’s yield curve inverts as investors dump short term bonds

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Political uncertainties surrounding the 2019 general elections and post-election confidence in the equity market have taken a toll on the Nigerian fixed income space, with the normal yield curve turning inverted on sell-off pressure.

Yields on shorter term instruments rose above longer term instruments for the first time this year in mid-January as the general elections drew close.

Rebounding from pressured down All Share Index performance by 17.81 percent in 2018, analyst believe that foreign investors are also taking position to enjoy resultant effects of good financial results by companies listed on the exchange.

Sell-off pressure on short term bonds has led to higher yields on 2 year government bonds as investors take position on longer term bonds especially the Nigeria 10 year government bonds.

While an inverted yield curve theoretically signals an abnormality in the economy and a predictor of economic recession, analysts opine that current trend noticed in the yield curve is short lived as a recession is unlikely.

On Tuesday, 19 February 2019 yields on 2-year government bonds stood at 16.605 percent against the 14.758% yield of the 10 year bond.

Yields on 2-year government bonds rose 184.7bp during last week, having climbed 111.9bp in the last one month and 251.3bp in the past year. Current yield is close to a one-year high of 16.8 percent as at the 13th of February 2019.

Meanwhile, 10 year government yield declined 3.5bp during last week, having dipped 27.8bp in the last month, 105.3bp in the past year. Current yield is close to a six-month low of 14.653 percent as at the 11th of February 2019.

Yields on longer term securities could be trending down when market interest rates are set to get lower for the foreseeable future to accommodate ongoing weak economic activities.

“We expect this trend to normalise after the general elections, as this is more of a reaction to political dramas in the country,” an analyst who pleaded anonymity told BusinessDay.

The inverted nature of the Nigeria yield curve further portrays that foreign investors perceive a more risky economy in the short term and prefer to take positions on the longer term.

However, Segun Afolabi, an investment analyst at Afrinvest said, “What we are seeing is investors positioning more in the equities market ahead of earnings season.”

This, in his view, has caused foreign investors to exit short term positions in the fixed income space and focus more on the equities market on post-election confidence.

To this end, “we expect to see yields on shorter term bonds rise some more compared to longer term bonds,” Afolabi opined.

Year to date analysis of the All Share Index shows that the equity market is up 2.42 percent.

 David Ibidapo