Nigeria's naira currency and the yield on its most liquid 3-year bond both surged on Wednesday, after state-owned energy firm NNPC sold $450 million to some lenders amid a central bank squeeze on liquidity.
The naira was up more than 1 percent to a 2-week high on the interbank market on Thursday, trading at 158.35 naira to the dollar at 1130 GMT, firmer than the 160.10 to the dollar it closed at on Wednesday.
Dealers said central bank action on Wednesday to tighten liquidity led to a shortage of naira cash to buy dollars.
The central bank on Wednesday sold 142.1 billion naira ($879 mln) in treasury bills and $318 million at 155.83 naira to the dollar at its bi-weekly foreign exchange auction, both aimed at mopping up naira liquidity.
The Wednesday move also led to a spike in overnight lending rates to more than a two-year high of 35 percent.
“Bond yields are responding to the illiquidity in the system. Investors are selling the shorter maturities to fund naira positions,” one dealer told Reuters.
“The naira is so illiquid. Bonds are on a sell zone.”
Yield on the most liquid 3-year bond spiked to 16.45 percent, from 15.23 percent on Wednesday. While 5-year and 10-year papers were trading marginally flat.
Nigeria's Central Bank Governor Lamido Sanusi has shown his determination to support the naira using aggressive monetary measures in recent months, despite calls from some in the private sector for him to ease interest rates to aid the growth of Africa's second-biggest economy.
Sanusi said last month that loose monetary policy was not the answer to spurring growth and would only risk higher inflation, currently running at 12.9 percent, according to the latest June figures.
He said Nigeria, Africa's biggest crude oil producer, spends too much of its budget on running the government and should allocate more to development and to a savings buffer against the risks of lower oil output and weaker global demand. .
Finance Minister Ngozi Okonjo-Iweala said on Wednesday that Nigeria's cabinet had agreed to increase spending by five percent but reduce the fiscal deficit in next year's budget, which will be sent to parliament for approval next month.
But the minister's oil price assumption of $75 per barrel, up from $72 in this year's budget, worried analysts. If the oil price projection is too optimistic, the government tends to raid oil savings to meet the shortfall.
The central bank two weeks ago raised the cash reserve requirement for lenders to 12 percent from 8 percent and reduced net open foreign exchange positions to 1 percent from 3 percent, to restrict the money supply to support the currency.
Last week the central bank also barred banks that borrow naira funds from its official window from using those funds to buy dollars at its by-weekly auction, a bid to crack down on currency speculation.