Nigeria’s 10-year Eurobond yield spike to 14.23% in July

Nigeria’s $1.5 billion Eurobond yield with a maturity of February 2031 rose to 14.29% as of July 12, 2022, according to data from the Debt Management Office.

The yield was about 13.4% at the end of June and was as low as 8.6% at the end of the first quarter of 2022 (Mar 31).

Nigeria’s ten-year Eurobond closed the first half of the year at a yield of 13.45% or $69.8 in unit price pointing to one of the worst yields in years for Africa’s largest economy. The current price is now $66.7.

The bond carries a coupon rate of 7.875% per annum, which is the interest received by original subscribers of the bond who prefer to hold to maturity.

What this means

• Bonds are investment securities that trade just like stocks and their price is determined by the forces of demand and supply.
• When investors show a lack of interest in bonds, the prices fall and the yield rises thus making it more difficult for cheaper borrowing.
• Nigeria has stated that it does not have any immediate plans to tap the Eurobond market due to the high yield environment.
• Issuing bonds in this market will cost the government more when it comes to paying back.
• The lack of Eurobonds also shuts out an important source of dollar inflows for the country.

Why the spike?

Recall Nairametrics had highlighted a trend of rising Eurobond yields for Nigeria’s sovereign debts and explained this was due to dwindling demand for emerging market bonds by most foreign investors.

• Emerging markets like Nigeria have seen bond prices fall following the Russia-Ukraine war and the decision by the US Fed to raise rates to combat rising inflation.
• A recent Financial Times article indicates about $50 billion have been pulled out of emerging market bonds as borrowing gets harder at a reasonable cost.
• A lack of demand for Nigeria’s longer-term Eurobonds is because demand has fallen as investors who hold these assets on a mark-to-market basis are selling.

Opportunities

A rise in Eurobond yield provides a unique investment opportunity for investors who are looking at diversifying their dollar-based portfolio assets, especially if they choose to hold the assets for the longer term.

• For example, for any $10,000 invested in Eurobond at the current price, you earn about $1400 (gross of any applicable taxes).