Nigerian Eurobond yields fell six basis points to 7.05 percent from 7.11 percent last week, as the market reacted to Trump's speech on the US-NATO agreement and the removal of initially threatened tariffs.
“The week started bearish, under pressure from a cautious stance amid high and volatile US Treasury yields, a stronger US dollar and uncertainty over the Fed's easing path. Sentiments improved in mid-week due to softening US yields, firming oil prices and a return to risk appetite as global financial conditions stabilised,” said Omobola Adu, economist at CSL Stockbrokers.
When yields go down (decrease), it means that it is becoming cheaper for Nigeria to borrow money internationally, and in the secondary market, it means that bond prices have increased.
Demand for shorter-dated instruments was particularly strong, albeit after several days of negative performance, supported by broad-based buying interest across the curve, including 2028 bonds (15bps) and 2029 bonds (10bps).
The Nigerian Eurobond market is recovering from the global selloff seen on Tuesday due to geopolitical tensions. In his speech at Davos on Wednesday, Trump did not appear as hostile as at his previous events. This prompted a bullish reaction for the rest of the week.
The average yield on Nigeria's Eurobonds also fell to 7.12 percent on Wednesday, from 7.26 percent on Tuesday and 7.14 percent on Monday.
Also read: Nigeria's Eurobonds recover from global selloff
“We expect this performance to improve in the coming week as more investors choose Nigerian sovereign instruments,” said Matilda Adefalujo, fixed-income analyst at Meristem Securities.
The US, Europe, Japan and other countries saw big selloffs in their bond markets on Monday and Tuesday as Trump's plan to impose levies on selected European countries as part of a bid to annex Greenland has revived questions about the unpredictability of his policies and their desirability for global investors.
Many investors turned to safe havens such as gold, which hit a record high of more than $4,800 an ounce. While Nigeria's yields have declined slightly, the fact that investors are still investing in gold suggests that the world is still on edge. For Nigeria, this means we are not out of the woods yet; Any sudden change in Trump's trade policies could push those yields (and our borrowing costs) up again.
What does the decline in yields mean for Nigeria?…
Nigeria must pay interest on Eurobonds in US dollars. This is the biggest pain point. Whatever dollar the government earns (mostly from oil), a large portion of it is immediately set aside to pay international creditors.
When yields fall, it indicates that Nigeria may issue new debt at lower interest rates to pay off older, more expensive debt (a process called refinancing). If the government can replace bonds yielding 9 percent interest with bonds yielding 7 percent interest, this saves millions of dollars that would otherwise have flowed out of the country.
The pressure on Naira is decreasing…
When Eurobond yields are high and investors are scared, they sell Nigerian bonds, which puts pressure on our reserves and weakens the Naira.
When yields move lower due to improving risk appetite,” (as seen after the Davos speech), it means investors are buying into Nigeria. This influx of dollars helps support the value of the Naira, which could ultimately lower prices of imported goods such as fuel and electronics.
