Negative Yields Dampen Prospect of Rise in Returns for FG Bonds

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Festus Akanbi

There are strong indications that negative real yields are discouraging the demand for Naira bonds, and that is unlikely to change over coming months as the Central Bank of Nigeria keeps its policy rate low to boost economic growth.

Returns on Naira bonds fell 14% in December after soaring 66% in the previous 11 months, according to a Bloomberg index tracking the debt, as investors snapped up yields that were in double digits for most of the year. The gauge extended its decline this year.

The December sell-off came as investors started fretting that the market is over-valued amid rising inflation and close-to-zero yields on some government debt. The outlook for inflation, which accelerated to a 34-month high of 14.9% in November, remains murky given pressure on the central bank to aid the recovery of an economy that’s in recession.

“We don’t see yields picking up rapidly soon or inflation dropping,” Wale Olusi, head of research at United Capital in Lagos, said by phone. “Expecting positive real returns anytime soon is almost asking for too much. The government and central bank need interest rates to be low and growth to return.”

The yield on the federal government 2029 naira bonds climbed 45 basis points this week to 7.44% as of the market close on Thursday. The yield fell as low as 3.75% in November.
Consumer inflation will remain in the double digits unless authorities reform monetary policy to focus on price stability, the International Monetary Fund said last month.

Adding to headwinds are the government’s plan to borrow as much as 4.28 trillion naira ($11.1 billion) in local and foreign markets to plug its 2021 budget deficit. Even so, domestic institutional investors may continue to buy naira bonds as they don’t have many alternatives, said Samir Gadio, the London-based head of Africa strategy at Standard Chartered Plc.

“Local bond yields will likely remain depressed in the coming months, but may have bottomed out,” Gadio said.