The rapid rise in the yields of Nigerian debt signals an end to the record low-interest-rate environment that characterised the year 2020.
The benchmark 10-year Nigerian government bond yielded 13.3 percent as of Friday, May 7, according to data from the trading platform, FMDQ. That is more than three times the 4 percent return on the same bond only six months ago in October 2020 and marks the fastest uptick in government bond yields since at least 2009.
The yields on one-year Treasury bills, which are short-term debt, have also gone up from a record low of 0.5 percent some six months ago to nearly 10 percent.
Analysts say the rapid rise in yields is a signal that Nigeria’s low-interest-rate policy is being phased out as monetary authorities look to make Nigerian debt assets attractive for domestic and foreign investors amid rising inflation.
“The CBN is repricing the one-year treasury bill due to the need to get local and particularly foreign investors to roll over,” said Wale Okunrinboye, head of investment research at local pension fund manager, Sigma Pensions Limited.
“The Q1 GDP numbers may tell us just how much the CBN is willing to bid rates higher, if the numbers are good, they are likely to tighten which could see yields rise even higher than current levels,” Okunrinboye said.
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Nigeria’s slow economic growth coupled with rising inflation and high unemployment rate – what economists call stagflation – have been a conundrum for the CBN, which seeks to balance its primary responsibility of maintaining price stability with stimulating economic growth. When economic growth is weak, the CBN is reluctant to raise rates.
The economy slipped into a second recession in five years last year as the pandemic took a toll on economic activity. The economy however limped out of the recession in the fourth quarter but the growth rate remains below the rate at which the population is growing, leaving little to cheer for long suffering Nigerians.
While rising yields is positive for investors, who will now get a higher return for parking cash with the government, it could cause corporate debt issuance to shrivel as the era of cheap debt draws to a close.
Nigerian corporates raised more debt than ever before in 2020, thanks to the low-interest-rate environment with data obtained from the Securities and Exchange Commission (SEC) and FMDQ showing that corporate debt issuance hit N1.114 trillion in 2020, the highest on record.
However, with yields on government debt rising, it now means corporates will have to pay more to raise debt.
The government will also pay more for raising debt. However, because the Patience Oniha-led Debt Management Office (DMO) has smartly raised nearly half of the 2021 borrowing target for the year while the rates were lower earlier this year than they are currently, the impact is likely to be less on government borrowing this year. It will be different next year, piling pressure on the government’s already high interest payment to revenue ratio, which was over 60 percent in 2020.
The stock market is also likely to see some investment reversals due to rising yields in the bond market.
“As bond yields rise, it will start to make sense for some investors to park cash in government bonds rather than stocks,” said Egie Akpata, a director at Lagos-based investment bank, UCML Capital.
The rise in bond yields this year could help explain why the stock market has not maintained its rally from last year, according to Akpata.
Nigerian stocks are down by 2.66 percent this year after a blockbuster 2020 that saw the same stocks rally by the most (50%) among emerging and frontier markets tracked by Bloomberg. The All-Share Index declined by 1.61 percent last week, according to data tracked by BusinessDay. Stocks had benefitted from the low interest rate environment, which forced investors to park cash in mostly dividend-paying stocks.
Nigeria’s runaway inflation was always going to make it impossible for the country to maintain a low interest rate policy for too long, with investors constantly seeking yield elsewhere and dumping the country’s debt assets.
Although the 10-year benchmark bond still yields well below inflation, the gradual uptick in interest rates is also expected to attract portfolio investment.
Inflation rate in Nigeria is at a four-year high of 18.17 percent. That was as at March 2021, according to the Nigerian Bureau of Statistics (NBS).
Attracting foreign portfolio investors will also depend on the availability of foreign exchange, according to some foreigners who spoke with BusinessDay.
