Analysts see negative outlook for Nigeria’s bond as low yields regime persists
The prevailing low yield regime in Nigeria’s debt market may not change in the near term as the Central Bank of Nigeria (CBN) pursuing its policy to increase credit expansion by banks in its bid to boost economic growth.
Yields on bonds fell 14 percent in December after soaring 66 percent in the 11 months to November, 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 percent in November, remains murky given pressure on the CBN 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,” Olusi said.
The yield on Nigerian bond maturing in 2029 increased by 45 basis points this week to 7.44 percent as of the market close on Thursday. The yield fell as low as 3.75 percent in November.
Consumer inflation will remain in the double digits unless authorities reform monetary policy to focus on price stability, the International Monetary Fund (IMF) said last month.
Nigeria plans to Adding to headwinds are the government’s plan to borrow as much as N4.28 trillion in local and foreign markets to plug its 2021 budget deficit.
Even so, domestic institutional investors may continue to buy local 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.
~With Bloomberg report