Nigeria is becoming a hotspot for bond investors as double-digit bonds yield and stable exchange rate has made the country’s bonds among the most attractive in the world. Little wonder why the 30-year FGN bond which made its debut last month was oversubscribed by 400 percent.
By market close on Friday, the 10-year FGN yields closed at 14.49 percent, making Nigeria’s bond the sixth highest yielding sovereign bond security in the world. While this is good news for investors seeking high return on capital, this is bad news for the government as the country’s treasury struggle to cope with the high cost of borrowing.
“I think most of the foreign investment coming into Nigeria has been going straight to sovereign debt in the past few months,” said Obinna Uzoma a Lagos based market analyst. “That explains why bond yields have been gradually dropping since last year when it was around 16.5 percent to about 14.5 percent today.”
Since reaching a one year high of 15.8 percent in October 2018, the 10-year bond yields have fallen consistently as buying pressure continues to drive prices higher and yields lower. As at Friday, bond yields had dropped more than 130 basis points in the last 6 months.
Maju Eldad, a Lecturer of Economics at Federal University of Gombe, Kashere told BusinessDay that “there has been a lot of asset rotation out of stocks to bonds in recent months.” Eldad explained that “investors are seeing double digit bond yields at zero risk in an economic environment where inflation has declined consistently for the past two years. Very soon, inflation will fall to single digits and we won’t be able to find bonds at this rate anymore, investors know this and that’s why there is a big rush into bonds today.”
The 5 countries with bond yield higher than Nigeria were Venezuela (46.58%), Argentina (23.57%), Turkey (20.15%), Egypt (16.09%) and Uganda (15.9%). While the countries ahead of Nigeria are either suffering from a full-blown economic crisis or spiraling inflation, Uganda whose inflation rate is barely 3.5 percent seems like a shock entry to the list. The unusual combination of very low inflation and high bond yield made Uganda the best country to invest in bonds based on real bond yields as Uganda’s real bond yields closed on Friday at 12.4 percent.
Real bond yields refer to the actual gain on investing in bonds after deducting inflation. Investors typically focus on the real bond yields when searching for investment opportunities in the bond market. Currently, Nigeria’s real bond yields was around 3.24 percent as at Friday as a steady drop in inflation in the two years have helped moved Nigeria from a negative real bond yield to a positive real bond yield.
“I think the real bond yield will continue to stretch gradually over the next few months as we expect to see lower inflation in the country and a gradual return to a normal yield curve in the country,” Uzoma concluded.