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Treasury investors enjoy 560 basis point inflation premiums, at least for now


Treasury yields rising is a gift to fixed income investors, but rising yields is also a bane to investors who are already holding guilt instruments because it means that the market value of the instrument is declining. This is the precarious position local investors find themselves as rising yields in the last few months has driven treasury yields from around 13 percent mid last year to 17 percent as contractionary monetary policy coupled with election risk in Nigeria is driving treasury yields near levels last since 2017.


On Friday, the 1-year treasury bill is traded in the secondary market at a yield of around 17.04 percent, compared with last reported inflation which currently sits at 11.44 percent as at December 2018. This translates into a 560-basis point premium for investors, making the one year note the most attractive in the market.


Yields on Nigerian bonds for the 5-year, 10 year and 20-year note traded within the 14.6 percent to 14.9 percent range on Friday as the yield curve remains inverted despite shrinking fears of a recession in 2019.  Even the spread between the 6 months and 1-year treasury bill is almost 300 basis points, causing investors to worry about what the wide spreads and yield curve inversion could mean.


An inverted yield curve is generally considered by economist to be a sign that a recession is near. The yield curve last inverted before the economic recession in 2016 and remained inverted until the first half of 2018.


Maju Eldad, an economist, told BusinessDay that rising yields could be a sign that investors expect inflation to rise within the coming months. The International Monetary Fund (IMF) earlier predicted that inflation rate in Nigeria will probably rise to 13.5 percent in 2019. That translates to a 2-percentage point increase from the last reported inflation rate.


Bismark Rewane also predicted a 13 percent year-end inflation on the back of “increased money supply that will drive up commodity prices in Q1, fallout from election which could raise output and push commodity prices, infrastructural developments in Q3 and increased Christmas demand in the last quarter of the year in his FDC 2019 outlook report.


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