Nigeria Treasury yield among highest in the world
In a world where investors are chasing high yield, Nigeria comes in as a first class destination. With the one year Treasury bill currently around 13.1 percent, Renaissance Capital reports that Nigeria treasury bills currently offers the third highest treasury yield in frontier markets and the fifth highest local currency yield when emerging markets and frontier markets are merged.
High yield in Nigeria has certainly attracted foreign investors as billions of dollars have been poured into the money market over the past year. In 2017, up to $3.2 billion was invested in money market instruments with the majority of investments entering the country in the fourth quarter of the year.
Around $2.1 billion was invested by foreign investors in Q4 2017 as inflation continued its downward trend compared to around $211 million invested in the money market in Q1 2017. Foreign investors were wary of investing in treasury bills at the time possibly due to high double digit inflation. Inflation peaked in January 2017 before it began its long deceleration for 16 consecutive months since last year.
In the first three months of 2018, foreign portfolio investors invested $3.52 billion dollars in money market instruments, that’s more than they did in the entire 2017.
Even though interest rates in United States is starting to normalise as the Federal Reserve Bank of America raised interest rate in June for the fifth time since March last year, at just 2.36 percent yield for the one year treasury bill, it is still miles behind yields offered in emerging and frontier markets around the world.
According to RenCap currency report, emerging economies such as Egypt and Turkey have local currency yields at 19.3 percent and 17.7 percent respectively. While frontier markets such as Argentina (39%), Ukraine (16.5%), Nigeria (13.1%) and Kenya (10.4%) are all offering double digit rates on their sovereign debt compared to their counterparts in developed markets who are mostly offering low single digit yields.
Countries with high yields have been attracting more foreign investments in the past one year, although the two rate hikes in USA this year have caused investment outflows to increase in emerging markets this year. Bloomberg reported last September that investors were increasing investments in emerging countries that pay the highest local interest rate. However, the story this year is a little different as traders now see more risk in investing in emerging countries at the same time interest rates are increasing in USA.
Bismarck Rewane, CEO Financial Derivative explained that due to unforeseen eventualities in the upcoming election in Nigeria, the current yield level is likely not high enough to compensate investors for political risk. To this end, there is a large tendency that foreign investors would exit the country and return after elections. This could push treasury yield higher to compensate for additional risk.
Abdullrauf Bello, Investment Research Analyst at WSTC Securities Limited expects inflationary pressures to increase due to election spending in the upcoming general elections. With increased spending, treasury yields are likely to rise. In addition, Rauf believes when political activity intensifies, Nigeria will become a less attractive destination to foreign investors.
Omotola Abimbola, fixed income and currency specialist, Ecobank Research suggest that the current high yields in Nigeria and other frontier economies is not solely attributable to political risk alone as rising interest rate in US and strengthening of the US dollar is driving capital outflows from the frontier and emerging markets. Omotola expects inflation to hover between 10-11 percent towards the end of the year and says it is unlikely that either one year treasury bills or inflation will hit single digit this year. He anticipates high currency volatility as election draws closer as investors charge higher political risk premium, thereby pushing treasury yields higher.
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