One day after its election, the US Federal Reserve met and cut benchmark rates for the second time this year. Jerome Powell, the Fed Chairman has even hinted that the bank may still cut rates in December.
The US benchmark borrowing rate is currently within the 4.50%-4.75% band. The country’s headline inflation fell by 50 basis points in October 2024 to 3.2%, from 3.7% as of September. How do these metrics affect Nigerian markets, and Nigerians in general?
Following the rate cuts on November 6, yields on the US treasury have been on a declining run, hitting 4.16 per cent, the US 3-year treasury rates also declined to 4.14 per cent, from 4.18 per cent the day before. Essentially, these yield rates serve as benchmarks for quite several investment assets domiciled in the US.
While rates are coming down in the US, the benchmark rate is appreciating in Nigeria. This year, the Nigerian Central Bank has hiked interest rates five times, by about 850 basis points cumulatively to reach 27.25 per cent. This policy shift is visibly impacting the fixed-income market.
This year, Nigeria’s one-year treasury bill has reached an all-time high of 22.1 per cent, with 91-day yields hitting as high as 18.5 per cent. The CBN’s one-year Open Market Operation (OMO) bills have also witnessed incredible yield rates, hitting as high as 24.28 per cent in November.
The contrasting situation in Nigerian and American fixed-income space has seen a surge of cash influx into the Nigerian fixed-income space. Between January and October 2024, the CBN witnessed a total T-bill subscription of N33 trillion, marking a 94 per cent growth from the N17 trillion subscriptions received during the same period in 2023.
On the OMO side, the CBN witnessed N11.6 trillion OMO bill subscriptions between January and November 2024.
Oluwaseun Magreola, the Head of Investment Management at STL Asset Management, speaking to BusinessDay highlighted the categorization of Nigeria as a frontier or pre-emerging market.
He noted, “Nigeria is usually categorized as a frontier or pre-emerging market. Essentially, a frontier market is a country with an illiquid stock market (undeveloped stock market with low capitalization in USD) composed of thinly traded stocks, which is typically too small and risky to be regarded as an emerging market. It is less established than an emerging market.”
He continued, “A frontier market screams high risk, and it makes investors very weary to invest in such markets.”
On how the rate cuts impact Nigerian markets, he noted, “In the international capital market, once there is a rate cut by the US Fed, it makes instruments traded by emerging and frontier economies very attractive as the yields become higher compared to what is obtainable in the US Market.”
Magreola, a portfolio manager with a special interest in the fixed-income space, highlighted that in periods when the U.S. Federal Reserve cuts interest rates, it becomes more feasible and appealing for emerging and frontier markets to raise capital by issuing new debt.
Following the conclusion of the U.S. quantitative easing program in 2021, the Federal Reserve initiated a series of rate hikes in 2022 to curb soaring inflation. This shift sharply raised borrowing costs for frontier markets, including Nigeria and other African economies. In 2022 and 2023, no African nation was able to issue Eurobonds amid the high borrowing cost.
As interest rates have steadily declined, African nations have begun returning to the international capital markets. In 2024, Benin and Côte d’Ivoire successfully issued Eurobonds, marking a resurgence in African debt issuance on the global stage.
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