EM’s Worst Bond Rout Far From Over as Nigeria Fights Inflation

The emerging world’s worst bond rout isn’t over yet as elevated inflation and dwindling liquidity concerns keep investors wary of Nigeria’s local-currency debt.

Naira bonds have lost almost 10% in dollar terms this quarter, extending their year-to-date decline to more than 28%, the worst in the Bloomberg Barclays Global Emerging Markets local currency index. That’s almost double the loss for Turkey, the second-worst performer.

Although consumer-price increases slowed in April for the first time in 20 months, the inflation rate in Africa’s biggest economy remains above 18%. Even with benchmark 10-year naira yields rising above 13% as the budget deficit widened during the pandemic, that’s still handing investors a negative real return.

“There could be further upside for yields,” said Samir Gadio, head of Africa strategy at Standard Chartered Bank. “Pension funds and local investors will probably seek to push yields even higher for now given negative inflation-adjusted rates and the sharp decline in bond maturities in May to June.”

EM’s Worst Bond Rout Far From Over as Nigeria Fights Inflation

The West African country’s debt has wiped out more than half of last year’s gains, when it outperformed the 7.5% return on the emerging-market index with an advance of 32%. The Bloomberg Naira Local Sovereign index fell 0.2% on Monday as the average yield climbed 13 basis points to 13.3%, more than three times the emerging-market average of 4%.

“Bonds are finally repricing to more adequate levels from excessively expensive valuations previously,” said Gadio. That’s been driven by a rise in short-term interest rates, more long-dated bond supply at auctions and the spike in inflation, he said.

The central bank will probably continue to drain cash from the financial system in a bid to contain inflation, said Omotola Abimbola, an analyst at Chapel Hill Denham in Lagos. That could further reduce demand for debt as liquidity tightens.

©2021 Bloomberg L.P.

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