In the second quarter of 2024, investors sold off Nigerian bonds as they became less interested in large returns and more focused on good governance.
This is based on the National Pension Commission’s (PenCom) Second-Quarter 2024 Report.
The pattern is indicative of a more general change in investors’ willingness to take on risk, especially in emerging economies.
Nigerian national bonds had a turbulent quarter as a result of investors looking for more reliable choices abroad due to effective governance in some industries, even if the yields were good.
According to the research, at the end of June 2024, the S&P/FMDQ government Bond Index, which monitors the performance of Nigerian government debt, has declined by 7.82%, from N593.86 billion in March 2024 to N547.61 billion.
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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.”
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.
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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%).
