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, Reuters reports.

The central bank on Tuesday raised its benchmark rate to 12 percent 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 percent from 20 percent.

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

"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.

On Tuesday, central bank 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 percent to 9 percent.

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 percent of national income.

Banks were quoting 10 percent on the interbank overnight lending market, a jump from Tuesday's 4.8 percent 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 percent, 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 114.97 billion naira 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.