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Tuesday, June 6, 2023

Why Rising U.S Treasury Yields are a Double Whammy for Nigeria

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Bond yields are rising in the United States (U.S) and around the world signaling a reflation in commodity prices which are jumping, as well as risk assets around the globe which are soaring.

MoneyCentral expects that for Emerging Markets (EM) like Nigeria the pass-through from rising yields is going to be a little bit murkier as on the one hand rising commodity prices like oil will be welcomed.

However, investors are expected to pull funds from Naira assets as the extra yield attracting fund managers to EM and frontier assets compared to developed markets shrinks, meaning there will be added pressure on the local currency.

The Nigerian currency the Naira is already touching multi year lows at close to N475 per dollar in the black market, while also trading some 3 percent lower in the Investor and Exporters (I&E) window, since February.

To make matters worse the specter of rising global commodity prices such as oil, wheat, copper and iron, will surely lead to imported inflation for countries who depend on imports of raw material for production as well as for finished goods.

This can already be seen in Nigeria, where the price of petrol which is regulated by the Petroleum Products Pricing regulatory Agency or PPPRA was set to rise over the weekend (on higher oil prices), only to be overruled by the national oil company NNPC, after an outcry by citizens on social media.

The rise in Treasury yields accelerated in recent weeks as vaccines and the $1.9 trillion Biden stimulus boosted bets on an economic recovery and inflation, with yields climbing to pre-pandemic levels.

Rates on 10-year Treasury notes are at 1.63 percent, poised for the highest since February last year.

Nigerian stocks have sold off this year, partly in response to the risk off sentiment as the main benchmark index is down 4 percent year to date.

With most assets in the country having negative real yields, inflation soaring and the red hot Bitcoin off limits for most domestic investors after being banned by the Central Bank, it means that prospects of portfolio flows are now much dimmer than at the beginning of the year.

Foreign investors are taking note.

They pulled a net sum of N14.06 billion out of Nigerian equities in the month of January, according to Nigerian Stock Exchange (NSE) data.

Additionally, total foreign transactions decreased by 32.04 percent from N69.92 billion (about $178.44million) to N47.52 billion (about $120.78million) between December 2020 and January 2021.

Expect the Naira to come under increasing pressure, despite higher oil prices as an economic recovery will increase demand for imports.

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