Nigeria’s Eurobond yields edged higher last week as investors reassessed risk across emerging markets following renewed signals that US interest rates could remain elevated for longer, increasing pressure on frontier-market debt including Nigeria’s.
According to Meristem Securities, average yields on Nigerian Eurobonds rose by 7 basis points to 6.93 percent from 6.86 percent in the previous week, reflecting broad-based selloffs across tracked instruments.
The investment firm attributed the movement to the US Federal Reserve’s decision to maintain a “higher-for-longer” policy stance, which strengthened demand for safer assets at the expense of riskier emerging-market securities.
The development comes as global investors continue to monitor the outlook for US interest rates, with expectations of prolonged policy tightness raising returns on dollar-denominated assets and reducing the attractiveness of frontier-market debt.
Meristem also noted that easing geopolitical tensions between the United States and Iran contributed to softer oil prices during the period, dampening sentiment towards Nigerian assets because of the country’s reliance on crude oil exports for foreign exchange earnings and fiscal revenues.
Research analysts at CSL Stockbrokers similarly reported a broadly bearish performance in Nigeria’s sovereign Eurobond market, with yields rising across most maturities during the week. The firm, however, said the selloff was largely driven by profit-taking activities rather than a deterioration in Nigeria’s fundamentals.
The brokerage firm’s view indicates that the selloff was driven more by investors booking profits than by concerns about Nigeria’s credit outlook. Analysts note that such profit-taking is common after periods of strong market performance and does not necessarily reflect weakening confidence in an issuer’s economic fundamentals.
“Investor sentiment remained underpinned by Nigeria’s improving macroeconomic fundamentals, particularly elevated crude oil prices and their positive implications for fiscal revenues and external sector balances,” CSL said in a market note.
Market participants say the recent weakness reflects broader global conditions rather than concerns specific to Nigeria.
Titilayo Daramola, a fixed income trader, said the movement in Nigerian Eurobond yields reflects broader developments in global markets, particularly the relationship between inflation and interest rates in the United States.
“If inflation remains elevated, investors will demand higher compensation for the inflation risk they are taking. That creates bearish sentiment and can trigger selloffs, pushing yields higher,” she said.
According to Daramola, the implications extend beyond the United States because higher yields on US Treasuries often force a repricing of riskier assets across emerging and frontier markets.
“Once yields on US Treasuries rise, investors will demand higher yields on other countries’ Eurobonds as well because they can already earn attractive returns from US assets, which are considered less risky than emerging-market securities,” she said.
“It is a global phenomenon with ripple effects across markets. Investors getting better yields in the US is often at the expense of emerging-market assets.” Daramola explained
Analysts note that Nigeria remains vulnerable to a prolonged period of elevated US interest rates because higher US Treasury yields typically lead investors to demand higher returns on riskier sovereign credits.
“We are going to be vulnerable because of the higher US dollar core rates. Yields on credits like Nigeria will reprice in line with movements in those benchmark rates,”said Victor Ogundijo, a fixed income trader at Cardinal stone.
The development highlights the delicate balance facing Nigeria as it seeks to sustain foreign investor confidence in the midst of an uncertain global interest-rate environment.
While improving macroeconomic indicators and stronger oil revenues have supported sentiment towards Nigerian assets in recent months, persistent hawkish signals from the US Federal Reserve could continue to influence capital flows and borrowing costs across emerging and frontier markets.
SOURCE: Businessday
