Nigeria’s high inflation rate has permitted a negative yield in the fixed income market. A whopping 527% oversubscribed the Central Bank of Nigeria’s (CBN) Treasury Bills for a 1-year tenor in June.
A bond produces a negative yield when the price investors pay for it is more than the interest and principal they’ll get back over its life. To show, if you purchase a Treasury note that pays 2% interest to maturity and the average inflation rate over the period is 4.5%, your real return is -2.5%.
There are various distinct reasons for the purchase of negative-yielding bonds, such as asset allocation, safe-haven assets, currency gain, and deflation risk. The data shows that Nigerian investors are actively participating despite the negative-yielding bonds
Recall, that the Central Bank of Nigeria changed to a more hawkish monetary stand in its last monetary policy meeting. Where the MPR raised to 13% after adopting an expansionary policy direction in the last two years. Although the apex bank’s interest rate hike was the simplest way to reduce inflationary pressures in the country. Some scholars and experts questioned whether it would have the desired effect.
The oversubscription of 182-day and 364-day treasury bills (NTBs) demonstrates that Nigerians continue to be interested in fixed-income securities. Especially considering the high level of volatility in various investment portfolios.
Although the Nigerian stock market has printed impressive returns year-to-date, Government securities are more guaranteed and safer for investors. The recent rise in interest rate presents more incentives for more subscriptions.