Nigeria’s Eurobond market ended February on a strong note, reflecting sustained foreign investor confidence despite global economic uncertainties. According to the Debt Management Office (DMO), the average yield on Nigeria’s Eurobonds dropped to 8.80%, a 41-basis-point decline from 9.21% at the start of the month.
This positive performance not only underlines robust investor appetite but also places Nigeria ahead of the broader Sub-Saharan African (SSA) Eurobond market, where average yields fell by 27 basis points to 8.4%.
Strong Investor Demand and Regional Comparison
Analysts at Afrinvest attributed the bullish trend to improving macroeconomic conditions in the region and a pivot toward lower interest rates.
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“The region continued to attract interest amid improving macroeconomic dynamics and lower interest rate pivots,” Afrinvest noted in its monthly report.
Nigeria’s performance was mirrored by other SSA countries, with Kenya leading regional gains. Yields on Kenya’s 2028 bond fell by 0.44%, while its 2048 bond dropped by 0.06%, indicating strong investor confidence following the government’s plan to introduce a centralized bond reporting system. This move is expected to enhance market transparency and boost efficiency.
Other regional players, such as Benin Republic and South Africa, also saw declines in yields on their 2038 and 2041 Eurobonds, respectively. However, Ivory Coast faced a different scenario, with yields rising across all its bond tenors, suggesting a more cautious investor sentiment.
Global Economic Factors Influencing Yields
Despite the generally positive performance, Nigeria’s Eurobond market experienced brief sell-offs in the last week of February, pushing yields slightly up from 8.79% to 8.80%. Analysts at CSL attributed this volatility to global risk-off trends, geopolitical uncertainties, and mixed economic signals from key global markets.
“In the U.S., Q4 GDP growth came in at 2.3%, aligning with expectations, while jobless claims unexpectedly rose to 242,000 (vs. 222,000 forecast), fueling concerns over labor market softness,” CSL analysts explained in a note to investors.
These global developments led to cautious trading in emerging market assets, including Nigerian Eurobonds. The broader market sentiment was influenced by fears of a potential economic slowdown in the U.S. and the uncertain path of monetary policy in advanced economies.
Debt Sustainability Concerns Emerge
While the high yields on Nigerian Eurobonds have made them attractive to foreign investors, economists are increasingly concerned about the country’s debt sustainability. Nigeria’s public debt, which recently crossed the N90 trillion mark, is raising red flags among financial experts. The country’s debt service-to-revenue ratio remains critically high, exceeding 80%, which is far above the 30% international threshold recommended by the World Bank.
Economists reiterate that the higher the yield, the more Nigeria will have to pay to service its debt – a situation compounded by the country’s already high debt servicing costs.
The growing allure of Nigeria’s bonds is a double-edged sword, as it provides the government with access to much-needed funds to bridge its budget deficit and finance critical infrastructure projects on the one hand. On the other hand, the increasing reliance on high-yield Eurobonds could escalate the country’s debt service obligations, further straining the federal budget.
Future Expectations
Looking ahead, analysts remain optimistic about the market’s performance, bolstered by strong liquidity inflows expected in March. Afrinvest estimates that N642.6 billion will come from coupon payments, while N562.5 billion is expected from maturities. These inflows are likely to support demand for Nigerian Eurobonds and maintain a bullish market sentiment.
“Additionally, a dovish interest rate outlook should reinforce the bullish bias. In the SSA market, the hunt for yield is likely to remain a dominant theme for sustained offshore interest in the region,” Afrinvest stated.
The dovish outlook aligns with a broader global trend of central banks in developed markets signaling a potential slowdown in rate hikes. Should this materialize, emerging markets like Nigeria could continue to attract yield-seeking investors. However, this scenario also means that Nigeria might need to keep offering attractive yields to maintain this interest, a strategy that could worsen its debt sustainability metrics.