Sticky Inflation Locks Nigerian Bond Yields Above 18%

Nigerian fixed-income investors should prepare for a prolonged stretch of elevated interest rates, with market analysts warning that any meaningful reversal in Federal Government bond yields is unlikely before the final quarter of 2026.

The caution comes from Coronation Asset Management, whose June 2026 Economic Note projected that a mix of sticky inflation, a restrictive monetary stance, and mounting fiscal pressures would keep yields firmly elevated through the third quarter. “We expect FGN bond yields to remain elevated through Q3 2026, with limited scope for a near-term reversal of the June repricing,” the firm stated.

The warning follows a decisive shift at the Debt Management Office’s June auction. The DMO doubled its issuance from N600 billion in May to N1.2 trillion in June, offering N600 billion each in the reopened 22.60 per cent FGN January 2035 bond and the 16.2499 per cent FGN April 2037 bond. The larger supply effectively dismantled the yield compression the market had enjoyed earlier in the year.

Investors responded by demanding higher returns. The marginal rate on the 2035 bond rose from 17.00 per cent in May to 18.34 per cent, an increase of 134 basis points, while the 2037 paper climbed from 17.04 per cent to 18.35 per cent. Even so, demand stayed firm. Total subscriptions reached N1.413 trillion, an oversubscription of about N213.49 billion, and the office eventually allotted N1.222 trillion.

The pricing pressure is rooted in resurgent inflation. Headline inflation rose for a third consecutive month to 15.93 per cent in May, up from 15.69 per cent in April, upending the disinflationary run recorded through 2025. The figure is still well below the 26.06 per cent recorded in May 2025, but the renewed climb has forced investors to demand a higher real-yield premium.

Heavy fiscal deficits compound the strain. The Federal Government has already raised N19.03tn through debt instruments this year, roughly 65.17 per cent of its N29.20tn budgeted domestic borrowing target. Monetary policy also remains tight. The Central Bank of Nigeria retained the policy rate at 26.50 per cent at its 305th meeting after trimming it by 50 basis points in February. External forces, including volatile Brent crude prices tied to Middle East tensions and a rigid United States Federal Reserve, have kept risk premia high.

The current episode echoes the sharp tightening cycle that began in 2024, when the CBN lifted the rate from 18.75 per cent to as high as 27.50 per cent before cautious easing started. That history explains why analysts see little room for a quick pivot now.

Looking to the July sale, Coronation expects marginal rates to hold in a 17.5 to 19.0 per cent band on long-dated reopenings, conditional on the MPC keeping rates unchanged at its July 20 to 21 meeting and inflation staying in the mid-teens. The firm flagged upside risk from “a fourth straight inflation uptick, a weaker naira, or another large NTB auction,” while a cooling would require “a clear, sustained lower inflation print or an MPC easing signal.”

For now, asset managers favour a defensive posture, preferring shorter-duration instruments over long-dated paper until disinflation resumes. Still, Coronation noted that “current long-end stop rates (18.3 per cent+) already seem attractive on a real-yield basis if the disinflation narrative resumes by H2 2026.”