Bond investors told to rethink strategies ahead rate cut

Fixed-income investors have been told to rethink strategies amid growing projections over a possible interest rate cut by the Monetary Policy Committee (MPC).

This year, the rates on the one-year Nigeria’s treasury bill (T-bill) has been on a steady decline at the last three auctions to 25.2 percent from 29.2 percent earlier.

The T-bill’s rate opened the year at 8.4 percent and closed 2024 at 22.9 percent for the 364-day bill.

Just last week, the one-year bill saw the highest subscription in nine years, with demand reaching N3.15 trillion, as investors positioned themselves to take advantage of the high interest rates.

Also the Central Bank of Nigeria (CBN) moved its MPC meeting earlier by a day to February 19 and 20, 2025.

The postponement buys the MPC time for the new inflation methodology yet to be published by the National Bureau of Statistics.

Analysts argue that the CPI rebasing will downplay the inflation rate, which could influence the MPC decisions.

Ayodeji Ebo, managing director/chief business officer of Optimus by Afrinvest, said that due to the likely decline in rates, investors should be mindful of reinvestment risks.

A reinvestment risk refers to the possibility that when an investment matures, one may not be able to reinvest that money at the same rate of return one initially received.

Ebo recommended the four strategies needed to invest in the fixed-income market before a likely rate cut.

Nigerian T-bills

Ebo recommended investing in longer tenors such as the 364-day T-bill, since a potential reversal in interest rates will not affect investments until they mature.

The minimum investment for T-bills is N50 million in the primary market and N100,000 in the secondary market, though this may vary among banks and investment firms.

FGN Savings Bond

In February 2025, the Federal Government of Nigeria (FGN) savings bond was offered with interest rates of 17.8 percent for the two-year instrument and 18.8 percent for the three-year instrument.

By investing in either of these maturities, investors can benefit from these rates in two or three years’ time, even if interest rates decrease in the future.

The minimum investment amount is N5,000, while the maximum is N50 million. Interest is paid quarterly on a prorated basis. Savings bonds can be bought from most investment banks.

Commercial Papers

Due to rising interest rates on T-Bills, the interest rates on commercial papers (CPs) have also increased, making them more attractive investments.

The common maturities for CPs are 180 days and 270 days.

Ebo recommended opting for the 270-day tenor to take advantage of the higher interest rates provided the interested investor can hold the investment until maturity.

You can access CPs through stockbrokers or investment firms. The minimum investment amount is typically N5 million, although some companies may set a lower minimum of N1 million.

FGN/Corporate Bonds

FGN bonds are typically long-term investments ranging from three to 50 years issued by the Debt Management Office (DMO) on behalf of the FGN), while corporate bonds are long tenured bonds issued by private firms.

At the last FGN bond auction in January, the FGN new 10-year bond was issued at record high coupon rate and yield of 22.60 percent. Also its seven year Feb-2031 bond hit record rates of 22.50 percent previously and has driven large investor interest.

The FGN bond is recommended for those with long-term funds, as maturities can extend up to 40 years.

“Savvy investors tend to purchase bonds when interest rates are high,” he said.

Currently, the average interest rate is around 18 percent, with shorter maturities (2-6 years) offering an average of 21 percent, in the secondary market,” Ebo said.

In contrast, longer-term bonds (22-25 years) are trading at an average of 17.8 percent.

“Therefore, investors can take advantage of the 2-6 year FGN bonds to secure a rate of over 21 percent per annum. This means that investors will benefit from this rate even if overall interest rates decline to 10 percent,” Ebo said.