Bond investors are being urged to reconsider their strategies as projections grow regarding a potential interest rate cut by the Monetary Policy Committee (MPC). Rates on Nigeria’s one-year treasury bills (T-bills) have been steadily declining at the last three auctions, dropping from 29.2% to 25.2%. At the start of 2024, T-bill rates were at 8.4%, closing the year at 22.9%. Despite this decline, demand for T-bills has surged, with a record-high subscription of N3.15 trillion last week, indicating strong investor interest in current high rates before any possible reductions.
The Central Bank of Nigeria (CBN) has moved the MPC meeting earlier to February 19-20, 2025, to accommodate the delayed publication of new inflation data by the National Bureau of Statistics. Analysts predict that the new inflation methodology will likely downplay the inflation rate, which could influence the MPC’s decision-making and monetary policy in the coming months.
Experts like Ayodeji Ebo, managing director of Optimus by Afrinvest, recommend that investors brace for reinvestment risks—where the returns on reinvested funds may be lower than the original rates once an investment matures. To avoid this risk, Ebo suggests focusing on long-term investments such as the 364-day T-bills, which will allow investors to lock in current rates even if they decline in the future. Other attractive investment options include the Federal Government of Nigeria (FGN) savings bonds, offering rates of 17.8% for two years and 18.8% for three years. The minimum investment for these bonds is N5,000, and they provide quarterly interest payments.
Commercial papers (CPs) have also become an appealing choice for investors due to the rise in interest rates. Ebo recommends opting for the 270-day CPs to benefit from high returns if the investment can be held to maturity. FGN and corporate bonds are also popular options, with recent FGN bonds yielding over 21% for shorter-term maturities. Ebo advises investors with long-term funds to consider purchasing bonds with maturities ranging from two to six years to secure high yields even if interest rates fall in the future.
SOURCE: BUSINESS DAY