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As with all stories, there is a beginning. With the history of Nigeria’s debt market dating back to as early as 1946, (54 years before the establishment of the Nigeria Stock Exchange) a time when the federal government issued bonds and channeled the proceeds therein to finance major construction projects.
After the Nigeria Stock Exchange (NSE) became fully functional in 1961, parent institutions like Central Bank of Nigeria (CBN) and Federal Ministry of Finance (FMoF) played vital roles of debt issuers and mangers, and bonds became issued on a yearly basis.
Then came the oil boom in the 70’s with its ability to generate massive economic revenue and facilitate increase in GDP. However, a major side-effect of this was a staggering decrease in investments in the productive sectors due to the fact that the economy became dependent on crude oil production and exportation.
When oil prices came crashing down in the 80’s, with economic demands still at same rate, it set the stage for huge fiscal deficits on the government because of already commenced development plans by the government, due to the urbanization that came with the oil boom. In fact, it was so much so that Nigeria had acquired a debt of over $30 billion.
The need undeniably arose for a bond market and between 1978 and 1992, bonds totaling N330 million were raised by select state governments. In 1999, significant reforms were made due to democracy and as a result, more states participated in the bond market to raise funds for various projects.
In 2002, Debt Management Office (DMO) was established to manage the affairs of Nigeria’s debt and to revive the bond market. This objective was well underway by 2003. CBN took a step back to act as Issuing House and Registrar while the DMO took over management of Nigeria’s debt as well as the issuance of longer tenured bonds, which is being done till date.
According to a 2013 report by the debt management office, available statistics indicate that the bond market development reached $1.8 trillion in 2012, having acquired a $.6 trillion increase after 2011.
Also, in 2014, data from DMO posits that the bond market capitalization which consisted of federal government bonds and treasury bills reached an impressive N7.63 trillion and is slated to grow in subsequent years.
Debt instruments are documents that serve as legally enforceable evidence of a debt and the promise of its timely repayment. Bond, bills, promissory notes are all examples of debt instruments.
The debt instruments and stock (equities) fall into the debt market and equity market respectively. Debt instruments are generally less risky investments than equities and investors know quite accurately the amount they expect as returns at the end of the year, so while equities might offer higher returns, it also leaves room for the possibility for otherwise. In a case where a company runs into difficulties, bondholders are prioritized and paid first before equity holders.
Where issuing a bond increases the debt burden of the bond issuer, stock/equity financing allows companies or individuals acquire funds without incurring debt.
Government Bonds and treasury bills are one of the safest investment securities across all asset classes. They are backed by central government and bondholders are first priority in any given situation.
Bonds are ‘fixed income’ debt instruments, typically utilized by Governments and large corporations when in need of capital. These bonds can be issued to finance the budget of an economy, capital projects, expansions etc. Government/Sovereign bonds are known to be one of the “safest investments” an investor can embark in because the default risk on a Government bond is extremely low.
Though bonds generally provide less income than equities and other investments, it is important for an investor to have bonds in his portfolio because:
Most bonds pay a fixed income on a regular basis which can be a very good investment for investors who have to remit some monies to for other purposes at specific times. An investor can hold a bond knowing that its semi annual payment will take care of certain obligations without any hassles.
Investors who have increased concerns about preserving their capital will find bonds more attractive than equities and some other investment classes because bonds repay principal at a specific date and they are debt instruments which must be repaid
Portfolio diversification is very important for capital preservation because most investments don’t move together in the same direction at the same time. Bonds give balance to an investor’s portfolio in situations where equity markets are down.
Yes! We all know bonds are relatively safe investments, but there are a few risks a bond investor needs to be privy to before taking any decisions.
If you buy bonds from a company or government that isn’t financially stable, there’s more of a risk you’ll lose money. This is called credit risk or default risk. Sometimes, the issuer can’t make the interest payments to investors. It’s also possible the issuer won’t pay back the face value of the bond when it matures.
This is the risk that the return you earn on your investment doesn’t keep pace with inflation. If you hold a bond paying 15% interest and inflation reaches 16%, your return is actually negative (-1%), when adjusted for inflation. You’ll still get your principal back when your bond matures, but it will be worth less in today’s Naira. Inflation risk increases the longer you hold a bond.
When interest rates rise, bond prices fall. When interest rates fall, bond prices rise. This is a risk if you need to sell a bond before its maturity dateand interest rates are up. You may end up selling the bond for less than you paid for it.
This is the risk that the entire bond market declines. If this happens, the price of your bond investments will likely fall regardless of the quality or type of bonds you hold. If you need to sell a bond before its maturity date, you may end up selling it for less than you paid for it.
In addition to issuing long term bonds, governments issue short-term Treasury bills (T bills) of up to one year maturity. These do not carry a coupon, but are sold on a discount basis. The issuance of Treasury bills affects the money supply by temporarily soaking up liquidity. Buyers pay cash in exchange for promises to pay, and so cash is drained from the monetary system. These bills can also be bought back to inject funds into the system.
Treasury Bills are sold through a bi-weekly auction conducted by the CBN. Buyers are requested to quote bids following which the average minimum bid is selected.
Treasury Bills are short term investments (maximum of 1 year) and they are discounted instruments, which mean investor’s get their profit beforehand, making it a good source of steady income.
Treasury Bills are very liquid and can be converted to cash quickly in a case where an investor needs cash urgently.
Treasury Bills are good investments for people who wish to save and they are also tax free, making them good investment outlets for your free and disposable cash.
Because of the short duration on treasury bills, the default risk is basically non-existent. The only major risk an investor should worry about is INFLATION RISK whereby inflation rates become higher than interest earned through the course of the year.
