Yields on Nigeria sovereign bonds rose sharply across maturities on Thursday 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 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.
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| Nwankwo, DMO chief |
President Muhammadu Buhari on 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.
On Thursday, 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 on Tuesday. The 10-year benchmark bond yield rose 136 basis points to 11.62 percent on the sell-off.
During a two-day cabinet retreat before Wednesday's inauguration, Nigeria's Vice President Yemi Osinbajo proposed a budget of 7 to 8 trillion naira ($40.2 billion) for 2016, up from 4.4 trillion this year, but did not say how it would be funded.
Economic challenges in Africa's top oil producer had been piling up in the run-up to the swearing-in of Buhari's ministers on Wednesday as government finances have been hit hard by the loss of vital revenues from crude sales.
In the interim, central bank governor Godwin Emefiele has provided both monetary and fiscal policy direction.
Finance Minister Kemi Adeosun backed Emefiele's stance on foreign exchange policy while she was being vetted by the Senate last month, saying that his approach created a "breathing space" for the economy, adding that it needs to be accompanied by fiscal and industrial policies.
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