Nigeria raises bond yields in drive to halt naira rout

Nigeria’s government raised the interest rate on local currency securities in a bid to attract investors to the assets as part of efforts to mop up excess liquidity, contain inflation and curb a slump in the naira.

The debt management agency is offering three-year savings bonds at 13.46%, 139 basis points higher than a previous sale in October and the highest rate in a year, according to a statement on its website on Monday. Last week, the Central Bank of Nigeria sold 99-day OMO bills — patronized by banks and offshore investors — at 13.9%, a 390 basis points increase compared to the rate at which it sold securities of a similar tenor in August.

Africa’s largest economy has struggled to curb inflation that’s running at 26.7% and contain excessive dollar demand, as short-term interest rates have traded far below the Central Bank of Nigeria’s monetary policy rate of 18.75%.

Offering higher rates will “drain excess liquidity, help to fight inflation and curb the naira chasing the dollar, which will help stabilize the exchange rate,” Ayodeji Dawodu, head of Africa sovereign and corporate credit research at BancTrust & Co. in London, said by phone. The approach, if sustained, will also see the rates “moving closer to effective real returns,” he said.

The move adds to other steps authorities have taken under President Bola Tinubu, who was sworn in on May 29, to arrest inflation and a more than 40% slide in the naira against the dollar.

The naira has suffered persistent volatility since Africa’s most populous nation eased foreign-exchange controls as it sought to simplify its exchange-rate regime and kick-start dollar flows to attract investors. Other measures include clearing a backlog of matured foreign-currency forward contracts and a 500 billion-naira ($625 million) package aimed at improving food supply, easing transportation costs and boosting manufacturing.

The increase in the policy rate and higher interest rates offered on naira debt securities means average yields for local-currency denominated sovereign bonds have risen to 15.99%, the highest since 2017, according to data compiled by Bloomberg.

“There’s a general repricing of bonds to reflect tighter monetary conditions and higher yields offered by government,” Dawodu said. “Government’s higher funding needs also tend to push up the rate.”