Nigeria’s bond yields rise, naira falls on foreign exchange curbs

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President Muhammadu Buhari gives an interview to Agence France-Presse at his hotel during the 25th African Summit in Johannesburg on June 14, 2015 (AFP Photo/Mujahid Safodien)
President Muhammadu Buhari gives an interview to Agence France-Presse at his hotel during the 25th African Summit in Johannesburg on June 14, 2015 (AFP Photo/Mujahid Safodien)

By Chijioke Ohuocha

LAGOS, June 29 (Reuters) – The cost of borrowing for Nigeria rose on Monday and the naira currency weakened again in the wake of the central bank’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.

The naira traded at 226 to the dollar on the parallel market, down 2.7 percent 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,” said Cobus de Hart at South Africa’s NKC African Economics.

On the interbank market, the currency, which is pegged to the central bank’s rate of 196.90, was at 198.90 naira.

The most liquid 5-year bond yield rose 12 basis points to 14.71 percent, up from 14.31 percent 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.

SENTIMENT SHIFT AT HOME

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,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank.

“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, fueling market worries that bond issuance may have to be raised.

Nigeria said on Monday it plans to sell between 180 billion naira to 240 billion naira of 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.

Trders said the outlook for inflation, which is hovering around the central bank’s upper limit of 9 percent, was also a reason why local investors were selling bonds now, with a view to buying them cheaper at subsequent auctions.

(Additional reporting by Oludare Mayowa; editing by David Clarke)

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