By Obinna Chima
Yields on Nigerian bonds increased sharply Wednesday following the unexpected hike in the Cash Reserve Ratio (CRR) by the Monetary Policy Committee (MPC), THISDAY investigation has shown.
THISDAY checks showed that yields on all the liquid FGN bonds increased significantly Wednesday compared with the previous day.
The Central Bank of Nigeria’s (CBN’s) MPC on Tuesday surprisingly increased the CRR to 12 per cent, from 8 per cent.
The committee had also reduced the Net Forex Open Position (NOP) to 1 per cent from 3 per cent.
However, the MPC left the Monetary Policy Rate (MPR) unchanged at 12 per cent and also kept the Standing Deposit Facility and Standing Lending Facility rates on hold at 10 per cent (MPR-200 bps) and 14 per cent (MPR+200 bps).
As a result of this, while yield on the 8th FGN Bond 2014 Series 1 increased by 45 basis points (bps) to 15.60 per cent yesterday, from 15.15 per cent on Tuesday, yield on the 7thFGN Bond 2015 Series 2 also jumped by 42 bps to 15.54 per cent yesterday, from 15.12 per cent the previous day.
Similarly, just as yield on the 9th FGN Bond 2012 Series 2 climbed 47 bps to 16.52 per cent yesterday, from 16.05 per cent, yield on the 5th FGN Bond also closed at 16.27 per cent.
Emerging Markets Strategist, Standard Bank Plc, London, Mr. Samir Gadio, described the hike in CRR as “a sharp tightening in effective monetary conditions.”
Gadio added: “What is surprising in our view is that the CBN had stopped its Open Market Operations in recent weeks, implicitly suggesting it was somewhat comfortable with overall systemic liquidity.
“Yet the MPC clearly stressed in its statement the need to reduce liquidity in the financial system, despite the detrimental impact this could have on the banking sector, a move we think was driven by the need to protect the central bank's exchange rate target.
“What is the rationale behind the tighter monetary stance? The CBN’s preventive move appears to be designed to squeeze liquidity and push up money market rates amid precarious global market conditions. Higher Treasury Bill yields should theoretically improve the incentive for local and international investors to hold naira-denominated assets, while the lower NOP will diminish the negative domestic positioning against the naira.”
Also, Standard Chartered Bank’s London-based Head of Macro-Economics and Regional Head of Research for Africa, Razia Khan, stated that the MPC’s decision was clearly aimed at supporting the naira. She said the impact of the MPC would be felt across fixed income yield curve.
According to her, the CBN was also worried about inflation risks – due to electricity tariff increases and higher government borrowing.
“The latest move formalises some of the tightening that was already under way. We expect the naira to be the immediate beneficiary of the policy measures. In the absence of a more significant impact on Nigeria’s oil earnings, the peg is likely to be sustained, helped by the CBN’s latest tightening,” she added.