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Tuesday, March 28, 2023

Naira Most Vulnerable to Rising U.S bond Yields on Negative Real Rates

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The Nigerian Naira is one of the most vulnerable currencies in the Emerging markets space to rising U.S bond yields and ensuing tantrum/pullback by investors on fears the Federal Reserve will raise interest rates, according to a recent research report by EM focused research firm Tellimer.

Global markets have sold off in recent weeks as a result of rising bond yields.

One of the inputs to a recent Tellimer Taper Tantrum scorecard was the real interest rate differential – the difference between real rates in EM/ and frontier markets (FM) and that in advanced economies (or AE), which signals a country’s ability to attract and retain foreign fixed income portfolio investors.

In its new research Tellimer explored this metric in greater detail by constructing an index of the real policy rate across 45 EM/FM economies and five AE.

“We find that the real policy rate differential is roughly half what it was in 2013 heading into the taper tantrum,” Tellimer said.

“Countries with a negative real rate differential and a large reliance on foreign portfolio investment could be at risk of further currency weakness if global risk aversion continues to rise, and countries with negative real rates and rising inflation could find themselves behind the curve in the absence of interest rate hikes.”

Nigeria currently has negative real rates with inflation at 16 percent and benchmark risk free rate at closer to single digits, with the Central Bank averse to raising rates amid an economy that just exited recession.

If longer-term yields in AE continue to rise and inflationary pressure persists, EM/FM monetary policy space will continue to shrink, according to Tellimer.

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