Bond Yields trigger Naira Depreciation

In anticipation that major central banks may start backing off policies that have flooded markets with cash, yields on Nigeria’s 10-year bonds have increased by about three per cent in the past two weeks as investors sell-off their securities.

According to Reuters, the 10-year bond, which is listed on the JP Morgan Emerging Market Government Bond Index, traded at 14.7 per cent on Wednesday, compared to the 11.8 per cent on May 30.

'Foreign investors are dumping bonds,' one dealer told Reuters, adding that bond prices shed N11 in one week.

The dealer said the sell-off had hurt the naira and panicked domestic funds, adding that it had triggered a shift to stocks which have gained over 40 per cent so far this year. Demand for Nigerian assets has been hurt by 'weak data from China signalling a slowdown for emerging markets and the risk that the United States could reverse its stimulus earlier than previously thought,' Standard Chartered Bank’s Head of Research for Africa, Razia Khan said.

Much of the money pumped out by major central banks to stimulate their economies had found its way into emerging markets as investors sought higher returns.

Last Friday, the naira eased to its weakest level in almost 10 months, owing to strong demand for the dollar from offshore investors selling bonds. The local currency closed at N160.10 naira per dollar on Wednesday as against Tuesday’s value of N159.55, while stocks shed 2.75 per cent.

'The central bank has been intervening with no real impact because (dollar) demand has been huge as investors exit bonds,' a Nigerian currency dealer said.
The central bank had sold $300 million at an auction on last Wednesday at N155.75.

The Emerging Market Strategist at Standard Bank, Samir Gadio said: 'The downturn in emerging debt and forex reflects concerns over the future of the federal reserve’s massive quantitative easing programme.'
However, dealers noted that the 10-year benchmark bond had been worse hit because jittery investors were switching from long-term maturities for cash and treasury bills.

JP Morgan had last year added the three most liquid Nigerian government bonds, maturing in 2014, 2019 and 2022, to its emerging market index, triggering a 300 basis point fall in yields. Dealers said the bonds are back to levels last seen before the index inclusion, dealers revealed.

'It is a timely reminder of the volatility of global flows, and how you cannot rely on that alone for reserves accumulation,' Khan said.