Declining treasury yields could spark interest in FGN issued Eurobonds

The Central Bank of Nigeria (CBN) OMO ban which triggered a demand surge for treasury bills may likely cause a shift to dollar denominated assets. The sharp decline in treasury yields which followed within days after the OMO ban is now making FGN Eurobonds more attractive than treasury bills which may push local investors’ cash to dollar-based funds investing in Eurobonds.

As at market close on Friday, the 90 days to 1-year FGN Treasury bill traded at a yield range of around 7.25 and 9.17 percent, compared to some long dated FGN Eurobonds which traded at yields ranging from 7.36 percent and 8.57 percent.

Analysts told BusinessDay that treasury yields are naturally expected to provide a decent premium for local investors who worry that high rates of inflation in the country and increasing risks of devaluation could hurt the value of their funds if held in local currency investment. However, the OMO ban seems to have eroded what was originally around 5-6 percentage point premium for local investors who chose to buy treasury bills above investing in Eurobonds.

“If the yields on both FGN Eurobonds and FGN Treasury bills are roughly the same, investors will most likely pick FGN Eurobonds because they are sure to enjoy protection from double digit inflation in the country and benefit from any currency devaluation that could occur in the country. Nigerians will always prefer to hold dollar over Naira if the interest rate earned on both currencies is the same, buying the FGN Eurobonds is the equivalent of holding dollar and buying Treasury bills is the equivalent of holding Naira,” one analyst explained.


“It is true that FGN Eurobonds are trading at roughly the same yields as treasury bills at the moment, but the longer duration of the Eurobonds doesn’t make it a normal like for like comparison. Eurobond prices are more volatile than treasury bills and as such investors could still lose money investing in Eurobonds once prices start to decline unlike treasury bills which are more stable,” said Obinna Uzoma, chief economist at EUA Intelligence.

“Also, you must note that the Federal Government can technically default on its Eurobonds while it can’t default on repayment of treasury bills because the repayment currency of treasury bills is its local currency. So, you see Eurobonds isn’t a direct substitute for Treasury bills. However, with more people scared that a devaluation may occur soon, you expect more people to be parking their cash in Eurobonds since the yields and roughly the same and they can benefit from the devaluation gains if it happens in the near term,” Uzoma added.

“I also think foreign investors who see our treasury bills trading at a rate that is 4 percentage point below inflation and at roughly the same yields as our Eurobonds will rather buy Nigeria’s Eurobonds than lock their money up in our local currency while there is all sorts of fears on devaluation in the country. Honestly, it’s just bad business for CBN to make treasury yields drop so low, there are more negatives than positives to this,” Uzoma concluded.


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