Nigeria’s corporate bond market draws N729bn from pension funds seeking higher returns

Cynthia Ezekwe

The Nigerian corporate bond market has seen a significant influx of funds from pension funds, amounting to N729.51 billion over the past year, ending May 2024, according to recent data.

The rising level of investment in this sector, analysts say, can be largely attributed to the market’s high returns, which have emerged as an appealing option for investors looking to protect their capital against the effects of high inflation and interest rates.

Recent data analysed by the Pension Fund Operators Association of Nigeria (PenOp) indicates that Pension Fund Administrators (PFAs) have substantially increased their holdings of corporate bonds classified as Available-for-Sale (AFS) during the period between May 2023 and May 2024. 

A breakdown  of the investment in corporate debt securities for May 2024 showed that HTM corporate bonds stood at N1.446.50 trillion, representing 10.83 percent of total assets under management by the PFAs. Available for Sale (AFS) corporate bonds stood at N729.51 billion; Corporate Infrastructure Bonds recorded N15.349 billion to account for 0.08 percent of the corporate debt securities, while Corporate Green Bonds (CGBs) closed at N266.41 billion.

According to PenOp analysts, this significant uptick in AFS corporate bond holdings can largely be attributed to the rising interest rate environment, which has made these instruments increasingly attractive to investors seeking high returns in the current economic climate.

The figures released by the National Pension Commission (PenCom) provide insight into the remarkable growth of the pension funds invested in AFS corporate bonds over the past year. Between September 2023 and May 2024, the investment amount grew from N395.67 billion to N471.89 billion in December, and then further surged to N871.38 billion in February, before closing at N729.51 billion in May, signifying a significant increase in pension funds allocated to this particular asset class.

According to Oguche Agudah, the Chief Executive Officer of PenOp, the surge in AFS corporate bond holdings among pension funds can be partly attributed to a strategy known as ‘trading to invest’.

Essentially, PFAs are selling older, lower-yielding corporate bonds in order to acquire newer bonds that offer higher yields, with the intention of holding these securities until they reach maturity. This approach enables PFAs to optimize the returns on their investment portfolios and stay ahead of the rapidly changing interest rate environment.

“The data reflects this trend, with Available for Sale (AFS) corporate bond holdings increasing from N270.34 billion in May 2023 to N729.51 billion by May 2024,” Agudah said.

Agudah stated that the strategic allocation of corporate bonds between the HTM and AFS categories is a vital tool in the hands of portfolio managers, as it allows them to craft investment strategies that deliver higher returns for pension contributions.

Joseph Osuagwu, a stockbroker based in Lagos, observed that, historically, Pension Fund Administrators have predominantly allocated their assets to government bonds, which typically offer comparatively lower returns.

“Corporate bonds, which offer higher yields than government bonds, have become an attractive option for pension funds. The report highlights that the demand for corporate bonds has increased significantly, with pension funds allocating a large portion of their portfolios to this asset class,” Osuagwu said.

The rise in pension fund investment in corporate bonds is also driven by the need to meet growing liabilities. As the population ages and life expectancy increases, pension funds are facing significant liabilities, which can only be funded by generating higher returns on their investments, Osuagwu noted.

According to David Adonri, vice executive chairman of Highcap Securities Limited, an investment banking and securities trading firm, the recent uptick in pension fund investment in corporate debt securities can be largely attributed to the rising Monetary Policy Rate set by the CBN. As the MPR increases, yields on new fixed income securities, including corporate bonds, also rise, making them more appealing to investors seeking higher returns. 

Adonri added: “The rise in PFA investment in corporate debt securities could also be attributed to safety in fixed income. Attention of institutional investors also shifted to debt where FGN is also active. Perhaps also, PFAs were reducing their exposure to equities, following a rate hike by the CBN. With the recent rate hike by CBN, the possibility is high that financial assets will generally migrate to the safety of debt and high return.’’