Nigerian Bond Yields Rise After Rate Hike Aimed At Luring Investors

Nigerian bond yields spiked across the curve on Wednesday after the central bank unexpectedly tightened monetary policy in an about-turn to curb inflation and attract foreign investors.

The Central Bank of Nigeria (CBN) yesterday raised its benchmark rate to 12 per cent from 11 percent, having cut rates only four months ago by 2 percentage points, and lifted the cash reserve ratio for commercial banks to 22.5 per cent from 20 per cent.


Yields on the benchmark 20-year bond rose 55 basis points (bps) to 12.7 per cent while the 10-year yield climbed 45 bps to 12.65 per cent. The yield on five-year paper, the most liquid maturity, gained 41 bps to 11.7 per cent.

“The MPC has signalled a tightening and rates have gone up. Lenders can place their funds with the central bank at 7 percent so why buy treasury bills at lower yields?” one trader said.

CBN governor Godwin Emefiele, said extra liquidity had not translated into more lending and cited inflation, at a 3-1/2-year high of 11.4 percent last month, and well above the central bank target of 6 per cent to 9 per cent.

Nigeria is going through its worst economic crisis for years due to a slump in crude prices which has weakened its naira currency and slashed government revenue. Oil exports account for about 70 per cent of national income.

Banks were quoting 10 per cent on the interbank overnight lending market, a jump from yesterday’s 4.8 per cent before the central bank rate decision.

There were no deals on Wednesday.

The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, bucked two day of gains to shed 1.19 per cent, as domestic funds switch to bonds, traders said.

Traders estimated the new cash reserve requirement will soak up between 350 billion and 400 billion naira. The central bank is also selling N114.97 billion in treasury bills to further drain liquidity.

The central bank vowed to keep the exchange rate stable despite sharp falls on the black market – some 40 percent below the official rate – due to a shortage of dollars.

“Part of the central bank’s intention in the rate hike is to attract foreign portfolio flow (FPI). However, I do not think this will be achieved because the forex policy is unchanged. Until this happens, we will see very little FPIs,” Vetiva Capital’s head of research, Pabina Yinkere, said.