Yields on Nigeria bonds and treasury bills rose across all maturities on Thursday after a pick up in inflation in Africa’s second-biggest economy, dealers said, prompting investors to hold positions ahead of next week’s rate decision.
Nigeria’s central bank will hold its rate setting meetings next Tuesday and analysts expect the bank to keep interest rates on hold at 12 percent, despite an uptick in inflation.
Bond and treasury bill yields have adjusted upwards, rising between 20 and 100 basis points, dealers said, after April inflation climbed to 12.9 percent, year on year, from 12.1 percent in March.
Successive hikes in interest rates by the central bank had spurred a sustained rally in bonds, but Tuesday’s inflation data reversed some of those gains, traders said.
The shortest 3-year bond inched up to 15.4 percent on higher inflation, from 15.1 percent, while longer tenor 20-year paper was unchanged at 14.39 percent.
Prior to the release of inflation, the 5-year bond was yielding 15.05 percent, but had now gone up to 15.36 percent, one dealer told Reuters, adding that next week’s rate decision was going to be key for bond yields.
“We are waiting to figure out what the central bank will do. Will they react to the trends in the rise in inflation? So far, investors have priced in a hold decision for rates,” he said.
Nigeria auctioned 35 billion naira worth of 5-year bonds maturing in 2017 on Wednesday at a yield of 15.24 percent, compared with 15.1 percent at its last auction in April.
“The market and central bank are both anticipating a peak in inflation of around 14.5 percent y-o-y in Q3. This mitigates the possibility of an unexpected hike in policy rates … or a significant sell-off in bonds,” Samir Gadio, emerging market strategist at Standard Bank, wrote in a note to clients.
Domestic pension funds, the largest buyers of Nigeria government debt, have switched from relatively poorly performing equities over the last year into fixed income.
Dividend yields for equities are around 8 percent. Dealers say foreign investors have been attracted Nigerian bond yields but worries over liquidity naira stability mean they have stuck with short term one-year treasury bills yielding around 14 percent.
The naira on Wednesday fell to its lowest level in two months against the U.S dollar on the interbank market, on strong dollar demand.
“The currency will continue to be important for the overall inflation outlook, and in the very recent past we’ve seen what may possibly be temporary pressures on the back of the euro area crisis,” said Razia Khan, head of Africa research at Standard Chartered Bank.