Half the Nigerian bonds listed on JP Morgan's emerging markets bond index (GBI-EM) will be removed on Wednesday and the rest next month, the U.S. bank said on Tuesday.
The decision, which means investment funds tracking the index will sell Nigerian bonds, adds to upward pressure on national borrowing costs from a sharp drop in oil revenues.
JP Morgan said this month it would drop Africa's largest economy from its index, citing a lack of liquidity and currency restrictions.
The bank said in a note 50 percent of bonds will be removed as of Sept. 30, part of its month-end index rebalancing, cutting Nigeria's weight to 0.79 percent. The weight of Brazil and South Africa will increase by 0.80 percent and 0.20 percent respectively.
In 2012, Nigeria became the second African country after South Africa to be listed in the index with a weight of 1.8 percent.
The estimated yield for Nigeria bonds on the index was quoted at 14.83 percent as of Sept. 25, marking the second highest yield after Brazil at 15.75 percent, the bank said.
Analysts said they expected bond yields to trade flat after the removal on Wednesday because domestic buyers have stepped in since foreigners left the market.
Yields on government bond spiked this month on the news of the index removal with the 10-year benchmark debt rising to as much as 16.68 percent, prompting the bond market regulator to widen spreads to calm volatility.
One European asset manager told Reuters in Lagos his fund was still interested in naira debt despite the index expulsion but would buy only if the yield rose to around 20 percent, to compensate for currency risk.
Nigeria's central bank, trying to stop the naira's slide, has pegged its rate against the dollar, turning inter-bank trading into a one-way quote market whose lack of transparency has upset investors.
JP Morgan said Nigeria would not be eligible for re-inclusion in the index for a minimum of 12 months.