The Federal Government of Nigeria (FGN) bond market has become a safe haven for investors as the decline in inflation has made government bonds more attractive.
The demand for FGN bonds in the secondary market has surged, driven by hopes that inflation will continue to decline throughout the remaining part of the year.
The gap between real returns has collapsed to less than 7% as inflation (33.40%) has started falling, reducing the negative yields on government assets. Local investors have been earning negative real returns on investment due to elevated inflation positions, but the decline in inflation has made government bonds more attractive.
The Debt Management Office (DMO) has reduced bond offers to investors in the local debt capital market to N190 billion from N300 billion, but allotted more government securities to investors at its August auction due to favorable asset pricing.
The secondary market for FGN bonds was slightly bullish on Wednesday, with contraction at the mid-segment and long end of the curve due to buying interests in the MAY 33 and JUN 38 bonds, respectively. The average yield consequently declined 6 bps to settle at 19.37%.
Across the benchmark curve, the average yield closed flat at the short and mid-segments but declined at the long end due to demand for the JUN-2038 bond. The yield required by investors to extend loans to governments via bond purchases reflects inflation expectations and the likelihood that the debt will be repaid.
As inflation continues to decline, investors are increasingly seeking refuge in FGN bonds, which offer a relatively safe and attractive investment option. The demand for FGN bonds is expected to continue, driven by the decline in inflation and the attractive yields offered by government bonds.
