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The New Forex Policy Is Crashing Bond Yields

The decision by the Central Bank of Nigeria (CBN) to adopt a flexible exchange rate following the conclusion of the Monetary Policy meeting yesterday has not taken long to start making an impact on investments.

The bond market is the latest to have been hit, as Yields on government bonds fell across maturities on Wednesday as traders bought debt to cover positions.

The CBN Governor, Godwin Emefiele, had on Tuesday announced that it would adopt a flexible exchange rate policy to restore the automatic djustment properties of the exchange rate, whilst retaining a small window for funding critical transactions.

Bond Yields fell between 11 and 46 basis points across maturities with liquid five-year debt down the most to 13.24 percent. Yields on the 2020 bond has been falling since last week in the run-up to the Monetary Policy meeting.

Before the CBN decision to float the Naira, traders had taken a short position on debt, expecting the monetary policy committee to hold rates at 12 percent to boost the economy so as to tackle slowing growth.

The 20-year benchmark paper, the most traded on Wednesday, fetched 13.24 percent, down 11 basis points from Tuesday’s close.

According to Reuters, Analysts expect the shift to a flexible interbank market from a de facto peg of around 197, which the central bank has retained for 15 months, to boost investor confidence and create more dollar liquidity.

Traders also predict that foreign investors are unlikely to return in the short term after exiting the debt market, prompted by JP Morgan’s decision last year to kick Nigeria out of its government bond index due to currency controls.

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