In a robust display of investor appetite, Nigeria’s Debt Management Office witnessed an oversubscription of more than three times for the reopening of the country’s longest-dated bond at an auction on Monday. The 2053-dated debt, offering a record yield of 18%, attracted total subscriptions amounting to 330 billion naira ($364 million), surpassing the 90 billion naira initially offered.
Contrary to this strong response, other bonds with shorter tenors, such as the 2029, 2033, and 2038 maturities, experienced undersubscription at the same auction. This trend suggests a notable preference among investors for the longer-dated debt, which, despite its extended maturity, remains attractive due to the unprecedented yield.
The demand for the 30-year paper reflects investor optimism, with many betting that it will yield substantial returns over inflation in the long run. Wale Okunrinboye, Chief Investment Officer at Access Pensions Ltd., emphasized that pension funds, designed to meet long-term liabilities, find the allure of a long-term asset yielding 18%, offering a significant premium over long-term inflation, irresistible.
“Pension funds exist to meet long-term liabilities, so if you have a long-term asset yielding 18% which is 500-600 basis points over long-term inflation, you load up,” Okunrinboye stated in an email response.
Despite the appeal of high yields, Nigeria faces the challenge of an expected acceleration in the annual inflation rate, projected to reach 27.7% in October, according to a Bloomberg survey of economists. This marks an increase from 26.7% recorded in September.
The record yield on the 2053 paper occurs amid calls from investors for the central bank to raise interest rates, aligning them closer to positive territory on a real, inflation-adjusted basis. Analysts caution that Nigeria’s negative real yields discourage foreign investors, even as the government implements measures to attract capital by easing exchange controls and undertaking broader economic reforms.
Samir Gadio, Head of Africa Strategy at Standard Chartered Plc, attributes the demand for longer-term paper to an assumption that market conditions will normalize in the medium term. He notes, “Bond yields are now at record highs, so it makes sense to increase duration exposure if one assumes that market conditions will normalize medium-term.”
As Nigeria navigates the complex interplay of inflation, bond yields, and investor sentiment, the success of the oversubscribed 2053 bond underscores the strategic decisions of investors seeking to maximize returns in a challenging economic environment.