Bond Yields Rise, Naira Falls on Forex Curbs

Written by on June 30, 2015

Central Bank of Nigeria corporate head office

Central Bank of Nigeria corporate head office

The cost of borrowing for Nigeria rose yesterday just as the naira weakened again in the wake of the Central Bank of Nigeria’s (CBN’s) new foreign exchange rules to conserve scarce reserves, traders said.

Investors had hoped for a sustained rally after smooth elections in March eased uncertainties about political risk in Africa’s biggest economy. But worries over the government’s finances and the continued slide in the naira have hit markets.

According to Reuters, the naira traded at N226 to the dollar on the parallel market, down 2.7 per cent since Wednesday when the central bank introduced rules to stop importers from sourcing dollars on the interbank market to buy a range of items.

“The fact that the forex controls introduced by the central bank have contributed to a wider gap between the official and parallel exchange markets is not surprising and should add upward pressure on inflation moving forward,” South Africa’s NKC African Economics, Cobus de Hart said.

On the interbank market, the currency closed at N198.90 to a dollar, just as the central bank’s clearing rate depreciated slightly by five kobo to N196.95 to a dollar, from N196.90 to a dollar.

The most liquid 5-year bond yield rose 12 basis points to 14.71 per cent, up from 14.31 per cent the day before the bank unveiled the currency rules but below 15.5 percent on the eve of the presidential election in March.

The 10-year benchmark yield rose 10 basis points to 14.25 percent on Monday, up from 13.75 percent before the central bank measures and below 15.38 percent on March 27.

Currency and bond markets in Africa’s top oil producer have been on the ropes since the price of oil, Nigeria’s main export, plunged last year. The central bank has spent more than $3.4 billion to defend the currency and fixed the exchange rate in February to curb speculation.

But the outlook remains negative, traders said.
“We have seen bond yields pick up lately on a negative shift in onshore market sentiment,” head of Africa strategy at Standard Chartered Bank, Samir Gadio told Reuters,

“This appears to reflect concerns about the exchange rate outlook and the realisation that foreign inflows may take longer to materialise if the FX regime is not adjusted,” he said.

New President Muhammadu Buhari said last week Nigeria’s Treasury was virtually empty, fuelling market worries that bond issuance may have to be raised.
Nigeria said yesterday that it plans to sell between N180 billion to N240 billion bonds at its three regular auctions in the third quarter.

“The market is expecting that government borrowing may rise more than expected, triggering a sell-off,” one trader at a major commercial bank in Lagos said.
Traders said the outlook for inflation, which is hovering around the central bank’s upper limit of nine per cent, was also a reason why local investors were selling bonds now, with a view to buying them cheaper at subsequent auctions.

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