Nigeria’s fixed-income market becomes attractive with huge investors’ oker
Nigeria’s fixed-income market has become increasingly attractive to investors, offering a stable and predictable return on investment amid the nation’s economic instability.
Conversely, the equities market has been in the eyes of the storm. While the Nigerian equities market saw substantial gains in the first quarter (Q1) of 2024, with the All-Share Index (ASI) rising to nearly 40 per cent, the second quarter (Q2) was not so spectacular. Moreover, trading activities on the local bourse in recent weeks have been marked by increased volatility and profit-taking. Factors such as socio-economic disruptions and profit-taking activities have led to decline as the bulls and bears continue to jostle for dominance.
Understandably, equities trading is not one-way traffic, but the soaring inflation and several other economic headwinds affecting businesses has negatively impacted its performance. Consequently, investors have are seeking the relative safety of fixed-income securities, which offer more predictable returns.
Fixed-income instruments such as government bonds, corporate bonds, and treasury bills have become attractive alternatives. Government bonds, for instance, offer higher yields due to the increased Monetary Policy Rate. These options have provided a safe haven for investors against the backdrop of rising inflation and volatile equity markets.
According to the FMDQ Exchange Financial Markets monthly report for June 2024, the federal government has raised about N4.13tn from bonds in the first half of 2024.
As of the end of June 2024, the total value of outstanding FGN bonds, which includes savings and green bonds, reached N26.22 trillion. This amount represents a substantial increase of 44.49 per cent compared to the same period in June 2023 when it stood at N18.15 trillion. As of May, the Debt Management Office (DMO) of Nigeria had an outstanding N1.5tn to raise from the Federal Government’s proposed N6tn bond having already raked in N4.5tn from previous issuances. The increased patronage of fixed means that investors may be favouring bonds for their stability in uncertain market conditions.
In addition to the stability they offer, fixed-income securities provide a predictable cash flow, which is particularly valuable in times of economic uncertainty. This reliable income stream helps investors manage their finances more effectively and plan for future expenses with greater certainty. The regular interest payments from these instruments offer a sense of financial security that is less dependent on market volatility compared to the unpredictable dividends from stocks.
Furthermore, Nigeria’s headline inflation which stands at 34.2 per cent as at June 2024, significantly higher than 22.8 per cent in the previous year is another factor making fixed-income securities more appealing. In an attempt to tame the rising inflation, the Central Bank of Nigeria (CBN) has responded by increasing the Monetary Policy Rate (MPR) to 26.75 per cent from 26.25 per cent. These economic conditions create a less favorable environment for equity investments. Although inflation erodes the real returns on bonds, the nominal yields are still attractive compared to other investment options. Moreover, the stability and predictability of bond returns are appealing in such an inflationary context.
Following the recent hike in the Monetary Policy Rate by the CBN, analysts have forecasted an upward repricing of fixed-income instruments, particularly short-term assets like treasury bills and commercial papers. This shift is expected to make these investments more appealing compared to stocks.
Afrinvest analysts, in their weekly market report, noted, “This trend is evident from the latest treasury bills auction, where average stop rates across all instruments increased by 172 basis points to 20.0 percent. We also expect a gradual rise in bond yields.
“On the other hand, rising interest expenses and shrinking profit margins may dampen corporate earnings of listed companies, leading to a more cautious outlook on equities. This scenario could drive investors towards fixed income assets, drawn by their attractive yields.”
This attractiveness to fixed-income instruments is also fueled by the Nigerian government’s aggressive borrowing targets, which ensure a steady supply of these securities. As the government continues to meet its borrowing needs through market-based approaches, the availability of high-yielding bonds and treasury bills remains robust. This provides ample oppourtunities for investors seeking to preserve capital and earn reliable returns.
Moreover, investors may have more reasons to shift towards fixed-income market as the Minister of Finance, Wale Edun, recently revealed that Nigeria planned to issue a diaspora bond of up to $500 million as part of its strategy to stabilise and grow the economy.
According to the Edun, “the domestic dollar-denominated bond, set for issuance in the third quarter, aims to attract investment from Nigerians living abroad and those with savings held overseas but also to demonstrate the strength and resilience of the economy amid ongoing economic reforms.”
Additionally, the CBN maintaining a tight monetary policy, has kept interest rates high. Other measures by the apex bank including Open Market Operations and high cash reserve requirements, underscore its dedication to managing liquidity and maintaining elevated interest rates, which in turn supports high bond yields. Market accessibility and the enhanced liquidity of fixed-income instruments also play a crucial role in their rising popularity.
Moreover, the trading of FGN Bonds on platforms like the Nigeria Securities Exchange and FMDQ OTC Securities Exchange has improved transparency and market confidence, further attracting investors.
