Trapped Foreign Investors Crash Nigeria Yields to 4-Year Low

LAGOS (Capital Markets in Africa) — Foreign investors in Nigeria trapped by the lack of dollar liquidity are reinvesting in short-term debt, driving down yields to new lows.

Discount rates on the high-yielding instruments dropped to the lowest levels since April 2016 as investors with nowhere to go piled into them. The stop rate for one-year paper, also known as Open Market Operation bills, fell to 9.9% at a central bank auction on Thursday, the first time the rates have fallen into single digits in four years. Securities with six months’ tenure fell to 8.7% and three months’ 7%.

Increased liquidity within the banking system as lending to the private sector slowed due to the coronavirus pandemic and dollar-trapped foreign portfolio investors have driven-up demand for the paper, leading to the fall in rates, Chapel Hill Denham analyst Omotola Abimbola said by phone.

A limited supply of new paper, against rising maturities of existing bills, has pushed rates even lower to between 5% and 7% in the secondary market, according to Abimbola. The regulator has reduced the size and frequency of issuances compared with a year earlier.

“You would rather buy OMO at 5% to 7% levels than buy treasury bills at 2% to 4%; that is the best alternative, except you, are buying bonds, and if you are buying bonds, you are taking on duration risk,” Abimbola said.