Here Is Why This Analyst Thinks Nigerian Naira Bonds ‘Look Cheap’

This year has been all about volatility in both the stock, Foreign Exchange and money market. Nigerian Stocks have been recorded several highs and lows whilst the exchange rate has depreciated by over 25% in the parallel market. Bond yields have also recorded its own version of volatility as traders pile pressure on the government by resisting Naira assets driving the value of bonds down and yields soaring. The huge sell offs due to elections has indeed made a lot of assets in Nigeria look really cheap and is now falling under the radar of foreign investors who will know are keenly waiting for the elections to be over before the pounce. Bloomberg has just confirmed this feeling after it interviewed an analyst with Rand Merchant Bank. Here is what she said;

Investors are relooking at the market because from a bond perspective you’ve got your yields at the highest levels ever,” Ramkhelawan-Bhana, a Johannesburg-based Africa analyst at Rand Merchant Bank, said by phone Thursday. There are “cheap assets to be had,”

The article also goes on to suggest that the recent moves by the CBN to close the rDAS is likely to increase dollar liquidity thus strengthening the naira.

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What are bond yields and why are they important to Nigeria

Just in case you don’t understand what this means let me explain. Nigeria borrows money every other month via sale of bonds. Those bonds are priced at say N1,000 per paper with a promise to pay for example 15%. However, buyers of these bonds need not hold it till maturity and can sell it whenever they wish just the same way you sell stocks. The more people sell bonds the lower the value such that from N1,000 the bond may now be worth just N800 thus losing N200 in value. With the interest rate still pegged at 15% regardless of what happens to the bond value, the yield now becomes 150 (15% of N1,000) divided by N800 (current value of the bond) which gives a yield of 18.75%. Therefore the return any buyer who bought at N800 will be getting on this asset will be 18.75%. Whilst the government continues to pay 15% interest rate on this debt the problem now is that if it decides to come to the market to borrow (sell bonds) again it will have to offer a rate that is close to or even higher than the current yield of 18.7%. This is more cost for the government as it now pays more to borrow. This won’t last forever as future bond sales may attract lower rates as yields come down when the economy stabilizes. That is why foreign investors know that this is a unique opportunity for them to buy Nigerian bonds.