Bond Yields Spike On Expected Tighter Liquidity

Yields on Nigeria sovereign bonds rose sharply across maturities last week with traders going short on debt in the expectation that a new cabinet would bring greater fiscal policy clarity and prompt the central bank to start soaking up liquidity.

The Central Bank of Nigeria (CBN) has been injecting cash into the money markets since September in a bid to ease liquidity and reverse declining growth in Nigeria, which has suffered as oil prices fell sharply since mid-2014, while the president took five-months to assign ministers, Reuters reported.

President Muhammadu Buhari, on last week Wednesday appointed former investment banker Kemi Adeosun as finance minister, putting her in charge of Africa’s largest economy amid its worst crisis in years, raising expectations of a clearer policy direction.

“As the news flow turns and liquidity in the fixed income market improves, investors may become a bit more cautious about bond valuations. The market could now want to reassess the medium-term outlook,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank.

Traders said the central bank has not issued open market (OMO) bills in three months in a bid to keep borrowing costs low, causing a liquidity surge which has shrunk bond yields to more than five year lows for some maturities.

The 2017 bond spiked 341 basis points to 10.43 percent as traders booked profits anticipating that the bank may resume OMO sales next week after the inauguration of ministers signalled a clearer outlook for government spending.

The five-year bond which was quoted at 15 percent at the start of April, yielded 6.9 percent last week Tuesday. The 10-year benchmark bond yield rose 136 basis points to 11.62 percent on the sell-off. In the interim, central bank governor Godwin Emefiele has provided both monetary and fiscal policy direction.