CBN Rate Hike: PFAs to Increase Investments in Bonds

Pension fund administrators (PFAs) in Nigeria are poised to increase their investments in bonds, as the recent interest rate hikes by the Central Bank of Nigeria (CBN) are making bonds more attractive to investors. The CBN increased its monetary policy rate (MPR), also known as the benchmark interest rate, by 200 basis points (bps) last week, following a 400bps hike in February. This has raised the prospect of higher returns for investors in bonds, making them more appealing to PFAs.

According to industry analysts, higher interest rates may lead to increased demand for fixed-income instruments, including government bonds, with PFAs adjusting their asset allocation strategies.

As of February 2024, over 70 percent of pension fund assets were invested in bonds, while nearly 10 percent were invested in money market instruments, according to Michael Oyebola, an analyst at Money counsellors and investment expert at a leading pension fund administrator. The CBN’s recent hikes in the MPR mean that fixed income returns will increase, as bond yields tend to rise as interest rates rise. This provides an incentive for PFAs to invest more in bonds.

This he said, “will then leads to higher returns for pension funds holding the assets. However, whilst this leads to higher yields for new bonds, existing bonds with lower yields become less attractive. As a result, the prices of existing bonds in the pension funds’ portfolio may decrease.”