Today, our chart shows the movements in FGN bond yields. We recall how the exclusion of individuals and local corporates from OMO auctions in 2019 triggered demand driven yield declines across NTB and FGN bonds. Average bond yield spiraled down to 8% levels in early 2020 and dipped even further through the pandemic as local investors sought haven assets. Since the recovery in yields which started in the Q1’21, average bond yields have at best touched 12%. 

However, in 2022, recent developments have seen yields retrace an uptrend touching levels last seen in Q4’19. So far this year, the monetary policy committee has increased the MPR by a total of 250bps to 14% and consequently, stop rates at auctions have begun to adjust to this reality. We also note the flattening FGN bonds yield curve; in our opinion investors are opting for longer tenored instruments as a way of hedging their positions against interest rate risk. On an inflation-adjusted basis, though still in negative territory, real returns have improved slightly from about -7%, to -6%. 

With the average yield on FGN bonds at over 12%, we do not rule out a fund rotation from risk assets into FGN instruments as investors seek higher returns on their asset portfolios. 

Also, we expect that secondary market yields should sustain the upward movement as investors selloff to take advantage of higher yields at the primary market auctions. 

This should only subside when stop rates at auctions plateaus. This level will be determined by the DMO and the level of borrowing costs it can contain. 

For attracting offshore funds, we maintain that the overriding concern for FPIs would be FX liquidity and the real rate of return. 

More so, the spate of monetary tightening globally opens emerging and frontier markets to the risk of capital flight. 

Although the yield environment in general is improving, the flattening yield curve dampens prospects of improved net interest margins  for banks.