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The recent synchronization between the fiscal policy and the monetary side has help bring down the yield curve down in the first quarter of 2018.
Moderating inflation rate, a positive economic growth, a loosened monetary policy in terms of the creation of the Investors’ & Exporters’ FX Window and naira devaluation coupled with reduction in domestic borrowing, are the catalysts to the flat yield curve recorded in the quarter.
The Debt Management Policy of the Nigerian Federal Government is to attain 60 percent of domestic borrowing, that is, Treasury Bills, FGN Bonds, Savings Bonds & Green Bonds, and then 40percent of foreign debt through euro bond issuance as compared to the current ratio position of about 75:25 percent respectively.
Nigeria has a Treasury bill portfolio of N2.7 trillion and paid off N198 billion worth of bills in December 2017, leading to rates dropping by around 300 basis points.
The Debt Management Office (DMO) issued in February 2018 US$2.5 billion in Eurobond as part of its on-going debt restructuring strategy aimed at increasing external debts and cutting down on domestic debts, the issued bond is to be used to redeem relatively more expensive domestic debt instead of rolling them over like before.
US$1.25 billion was issued in 12-year tenor Eurobond maturing in 2030 and a second tranche of US$1.25 billion in 20-year tenor Eurobond to mature in 2038. The yields on the 12-year tenor bonds came in at 7.14 percent, 425 basis points premium on 10-year US
treasuries while the 20-year tenor bond was priced at 7.68 percent, 455 basis points premium on US treasuries.
A flattening yield curve indicates the yield spread between long term and short term is decreasing, that is, a decline in the gap between yields on short-term bonds and yields on long-term bonds. This makes the curve become less steep. Although, the normal shape of the yield curve is generally known to be upward sloping.
The inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This is considered to be a predictor of economic recession.
Flat yield curve is often seen during transitions between inverted and normal curves and as such the investor does not gain any excess compensation for the risks associated with holding longer-term securities.
It is typically indication that investors and traders are worried about the macroeconomic outlook. One reason the yield curve may flatten is market participants may be expecting inflation to decrease or the Federal Reserve to raise the federal funds rate in the near term.
Meanwhile, the rate at which the prices of goods and services increase in Nigeria (inflation) moderated to 14.33 percent in February from 15.13 percent the previous month, making it the thirteenth straight month of decline, but still remains well above the 6-9 percent preferred band, according to data provided by the National Bureau of Statistics (NBS).
The Monetary Policy Committee (MPC) last week Wednesday held its benchmark rate of 14 percent for the ninth successive time since raising it by 200 basis points in July 2016, in a bid to allow inflation rate moderate further.
Nigeria’s Purchasing Managers’ Index (PMI) rose strongly in March, expanding from 54.7 percent to 59.4 percent.
The shape of the yield curve is often used by economists and investors to gain insight about what is happening in an economy.
When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates.
It may also reduce the incentive for banks to lend to the private sector as they often prefer to invest in lower-risk or risk free Government securities.
For consumers an inverted yield curve has an impact when their loans have interest-rate schedules that are periodically updated based on short-term interest rates.
Many Nigerian consumers experienced this last year when some banks sent out notifications increasing the interest rates on current loans.
Endurance Okafor
