Nigeria’s fixed-income market is expected to see moderation in yields and analysts warn that while current yields are enticing, investors should be cautious about locking into higher rates for extended periods.
“A combination of factors clearly favours a longer duration fixed income strategy and a careful watch on re-investment risks linked with currently attractive short-dated fixed income instruments,” said CardinalStone analysts in their mid-year outlook report.
They noted that fixed-income yields are high and probably unsustainable, adding that the exchange rate looks relatively stable versus the first quarter of 2024.
The analysts also said that fixed-income investors should be mindful not to fixate on currently elevated effective yields on T-bills at the expense of locking down north of 21 percent annual interest rate on government bonds for an extended period.
“Inflation looks set to dip on the impact of the high base effect starting from the second half of 2024,” CardinalStone said while recommending an increasing tilt towards long duration and a calculated moderation of short duration.
In the first half of 2024, Nigeria’s fixed-income market experienced a significant rise in yields driven primarily by the Central Bank of Nigeria’s (CBN) efforts to combat inflation and tighten liquidity.
This led to tighter credit conditions and higher yields on Nigerian Treasury Bills (NTBs) and bonds. The significant tightening of these monetary policies led to a sharp increase in interest rates across the yield curve, with investors demanding higher returns on their fixed-income investments, especially for shorter-dated maturities.
The fixed-income market had average yields on TBills and Bonds at 21.80 percent and 18.80 the first half of 2024 compared to 11.35 percent and 14.17 percent in the same period 2023, respectively.
The alignment in treasury bill rates with the MPR, foreign portfolio investments worth $4 billion (year-to-date) trickled into the Nigerian debt capital market.
Similarly, an analyst at Meristem in its recent report said that yields on fixed income will hover around current levels, owing to the countering impact of the monetary authority’s price stability objective and the need for the government to moderate its borrowing cost.
“For the second half of 2024, we anticipate that the attractive domestic fixed-income yields will sustain investors’ interest in Nigerian assets, particularly as the monetary authority maintains its contractionary stance,” they noted.
“We maintain that real rates of return remain negative. However, with inflation expected to decline in the second half and fixed income rates expected to decline only marginally, we anticipate the negatives to narrow,” the report said.
Meristem analysts forecast that foreign portfolio investment inflows and other investments are expected to remain high and result in the highest total capital inflow recorded in 4 years.
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“Expected volatility in the fixed income yields in the second half may spur increased provisioning for life and annuity funds, thus dampening earnings performance,” it said.
Meristem recommends investors adopt a long-duration strategy in 2024 to capitalise on the current high yields in long-dated government instruments such as bonds.
“By taking a long position in these instruments, investors can avoid the reinvestment risk associated with short-dated instruments, especially when yields start to trend downwards. Our forecast suggests that yields will gradually decrease in 2025, making it essential to lock in high-yielding investments before the decline,” it said.
Also, analysts at CSL Stockbrokers Limited anticipate a moderation in the general yield curve for the Nigerian fixed-income market in the second half of 2024.
“This expectation is based on several factors, including higher base effects and lower foreign exchange volatility, which should improve confidence and liquidity,” the report said.
Additionally, foreign portfolio investments (FPIs) are likely to remain subdued until there is sustainable stability in the FX market and we do not anticipate a sharp decline in fixed-income rates.
The Debt Management Office (DMO) is under less pressure to raise funds, having already secured over N12 trillion of the estimated N20 trillion projected for the debt markets this year.
“We forecast a moderate 50 to 100 basis points moderation across the yield curve in the second half,” CSL analysts said.
