Nigeria’s Fixed-Income Investors See Inflation Eroding Returns

LAGOS(Capital Markets in Africa) — Local investors are piling into Nigeria’s short-term debt even though rising inflation means that they are reaping negative real returns.

Prices increases in Africa’s largest economy accelerated for a 13th straight month in September, according to data released by the statistics agency on Thursday. Even so, rates on Treasury Bills slipped to the lowest levels seen in more than 10 years at an auction on Wednesday.

The one-year bill sold at a yield of 2%, while rates on six- and three-month paper dropped to 1%, the lowest ever. The total subscription was almost five times the amount offered, indicating excess liquidity in the market as pension funds struggle to find alternative investments after being barred from buying central-bank notes almost a year ago.

Nigerian bondholders are helpless in the face of the lower yields and lack of reward for savings, said Temitayo Peters, a fixed-income analyst at Asset Resource Management.
“It is a case of what else are we going to invest,” Peters said. “People are closing their eyes to get any yield they can even though it doesn’t make sense.”

Rising food costs have been stoking inflation in Africa’s largest crude producer with the headline rate at 13.7% in September. All fixed income instruments in the country are now offering negative real yields with the government bond maturing in 2049 at 9% as of 2:49 p.m. Thursday.

Yields are unlikely to bottom out before the end of the year, Peters said. “I wonder how much lower it will go before something changes.