Archives September 2024

Take advantage of our Bespoke ERP Solution. Contact us today at info@synccapitalng.com. Sync Capital….your catalyst for growth!

Nigerian bonds faced selloffs in the second quarter of 2024, as investors increasingly prioritized good governance over high yields.

This is according to the Second-Quarter 2024 Report of the National Pension Commission (PenCom).

The trend reflects a broader shift in the risk appetite of global investors, particularly in emerging markets.

Despite attractive returns, effective governance in some sectors pushed investors to explore more stable options elsewhere, leading to a volatile quarter for Nigerian sovereign bonds.

7.82% decline in bond index

The report revealed that the S&P/FMDQ Sovereign Bond Index, which tracks the performance of Nigerian sovereign debt, dropped by 7.82%, falling from N593.86 billion in March 2024 to N547.61 billion by the end of June 2024.

The report read: “As of June 30, 2024, the S&P/FMDQ Sovereign Bond Index, which monitors the performance of sovereign debt issued by the Federal Government of Nigeria, recorded a further decline. The index decreased by 7.82% from N593.86 billion as at March 29, 2024, to N547.61 billion. This reflects continued volatility and changes in the sovereign bond market during Q2:2024.

“Also, Nigerian bonds experienced a sell-off as investors emphasized good governance over high yields in emerging markets.”

Investors’ concerns over governance overshadowed the appeal of high returns, especially as the Central Bank of Nigeria (CBN) raised its Monetary Policy Rate to a historic 26.25% to curb inflation, which had risen to 34.19% by the end of Q2 2024.

It added: “Interest rates across the Naira yield curve showed mixed movements, with short-term rates rising by 190 basis points due to liquidity tightening by the Central Bank of Nigeria (CBN), which raised rates by 150 basis points to a historic 26.25% during its May MPC meeting.”

Sales of N1.23 trillion in bonds

The Federal Government of Nigeria (FGN) intensified its borrowing during Q2 2024, auctioning N1.23 trillion in bonds. While this contributed to a retracement in bond yields from the elevated levels of Q1, the FMDQ S&P Nigeria Bond Index still saw an 8.2% rise in Q2.

However, the year-to-date performance remained negative at -3.9%, indicating that investor sentiment had not fully recovered.

The report noted: “On the longer end of the spectrum, the Debt Management Office (DMO) auctioned N1.23 trillion in bonds, contributing to a retracement in yields from the peak levels observed in Q1 2024, particularly across less actively traded bonds. This yield adjustment led to an 8.2% rise in the FMDQ S&P Nigeria Bond Index for the quarter, although the year-to-date performance remained negative at -3.9%.”

In an effort to tighten liquidity through Open Market Operations (OMO), the CBN recorded sales amounting to N2.9 trillion and a one-year stop rate yield of 28.95%.

Also, Treasury Bills sales, totaling N2.85 trillion in Q2, saw their average stop rates rise by 323 basis points, reaching 18.08%, while the one-year bill closed at 20.68% (effective yield: 26.03%).

Pension Fund Asset Managers invest in government securities

The report further showed that investments in Federal Government Securities surged by 6.22%, growing from N12.20 trillion in Q1 to N12.96 trillion by the end of Q2 2024. This increase was mainly due to investments in FGN Bonds, which accounted for 96.43% of total FGN Securities.

It added: “Pension Fund Assets were mainly invested in Federal Government Securities (FGN), which accounted for 63.27% of total assets. The composition of investments in FGN Securities were as follows: FGN Bonds, 96.43%; Treasury Bills, 1.95%; and Agency, Sukuk and Green Bonds, 1.62%.”

What you should know

Nairametrics earlier reported that the Central Bank of Nigeria (CBN) incurred an estimated N1.55 trillion in interest payments for the 12 successful Treasury Bills (T-Bills) auctions conduced in the first six months of 2024.

The interest costs in 2024 were approximately 654.7% higher than the N205.63 billion recorded the same period of the previous year.

Data from the apex bank revealed that the apex bank has sold Treasury Bills worth N8.4 trillion in the first half of the year for tenors ranging from 91-days, 182-days and 364-day bills.

The Central Bank of Nigeria (CBN) surprised many by raising interest rates for the 13th consecutive time, lifting the benchmark rate from 26.75% to 27.25%. Governor Olayemi Cardoso stated at a briefing that the move was necessary to tame persistent inflation, stabilise the naira, and attract foreign investment.

This decision distinguishes Nigeria from other central banks, such as those in the US, Indonesia, and South Africa, which are either cutting or holding rates steady. But with inflation dropping for two straight months, why is the CBN still raising rates?

Although inflation slowed to 32.2% in August from a peak of 34.2% in June, the CBN remains cautious. It’s been battling inflation for 19 consecutive months and is not yet convinced that the worst is over. Factors such as rising electricity tariffs, higher food prices, and currency depreciation continue to pressure the economy. These factors, compounded by recent 45% increases in fuel prices and devastating floods affecting food production, have put Nigeria in a unique position. As Governor Cardoso said, “We are not out of the woods yet, and we cannot take any chances.”The MPC’s goal is not only to bring inflation further under control but to create positive real interest rates—where interest rates on investments outpace inflation. This would make Nigeria more attractive to international investors and stabilise the exchange rate.

What does this mean for you? Raising interest rates is a double-edged sword. On one hand, it fights inflation, helping to stabilise prices and the naira. On the other hand, it increases the cost of borrowing, making it more expensive for businesses and individuals to get loans. As borrowing costs rise, operating expenses increase, profit margins shrink, and economic growth slows. If not managed carefully, this could lead to an economic downturn or recession.

For you, higher interest rates may mean higher costs for loans, and other credit-related products. But it also means you can benefit from higher returns on investments in naira-denominated assets to hedge inflationary pressures on your savings.

Talk to us today at SYNC CAPITAL for more insights