The Federal Government of Nigeira Savings Bond offer for February 2023 opened and closed last week with the 3-year bond having a yield of 11.043 per cent while the 2-year bond has an interest rate of 10.043 per cent.
Also, the Debt Management Office (DMO) had released the offer circular for the FGN bonds with rates ranging from 12.5 to 16.2499 per cents. The auction of FGN Bond which will be re-openings of 10-, 20- and 30-year bonds is expected to hold on February 13, 2023.
While these rates are much lower than the current inflation rate of 21.34 per cent and benchmark interest rate of 17.5 per cent, it is still one of the good and safe return on investment that is available in the country at the moment.
The current rates being offered by the Debt Management Office (DMO) which raises these bonds on behalf of the federal government is also better than the current Treasury Bills rate . Treasury Bills, also known as T-Bills, are government-backed, short-term securities issued by the Central Bank of Nigeria (CBN).
T-Bills which have a maximum tenure of 364 days are issued when the government needs to borrow funds for a period of time and are sold at a discount from their face value. Although similar to a short-term bond, T-Bills are different and offer low yields compared to high-risk investments.
Bonds are a kind of fixed income investments that pays periodic interest but unlike treasury bills they are issued not at discount but at par, which means that they are sold at a price of N100 or N1000.
After investing in it, periodically investors get interest payment either quarterly, semi-annually or annually. In Nigeria today we have two types of bonds, the ones that pays quarterly and the ones that pay semiannually.
The savings bond, pays bondholders quarterly and was introduced by the DMO in 2017 to was introduced to enable households and individuals retail investors invest in small size bonds. So with as little as N5,000 individuals can buy into that bond.
It is the retail version of the FGN Bond which targets high-networth individuals, institutional investors and fund managers who invest a minimum of N50 million the FGN Bond is issued at par of N1000 and gives interest semi-annually.
There are advantages to buying bonds and there are also disadvantages to it, because bonds are very sensitive to interest rate movement. So typically there is an inverse relationship between interest rate movement and the price of a bond. If a bond is issued today at par of N1000 and pays 10 per cent coupon which is always the interest on it.
Bonds are also traded on the secondary market apart from when they are issued and yield is what you get from the day of issue till it matures. On the day it issued, the coupon and the yield are the same but from the second day the coupon remains while the yields keep changing because bonds are also traded on the secondary market.
Anytime the yield goes higher than it was issued, the price of the bond will go down, thus, if the bonds was sold at 10 per cent and one month down the line the yield has now gone to 12 per cent, what it means is that if you bought the bond at N1,000, it may now be selling at N950. If interest rate is lower say at nine per cent, the bond you bought at N1000 could now be selling at N1100.
There are two opportunities you get in investing in bond. One is the coupon payment which is the periodic interest savings and it is fixed from the day you bought the bonds till maturity, the other type of benefit is the mark to market which is the benefit that is accrued from capital appreciation on that bond, assuming interest rate move in your favour and you sell it before maturity.
Unlike Treasury Bills, FGN Savings Bonds has a duration of between two to three years while T-Bills are not more than 1 year with shorter tenors of 91 days and 182 days. Treasury Bills rates are determined by the forces of demand and supply.
While the interest on the FGN bonds and Savings Bond are paid quarterly, T-Bills interest rates are paid upfront. For example, if you invest in Treasury Bills today, they will pay you all your interest today. For FGN Savings Bonds, it will be at the end of the first quarter.
