Fixed income yields to moderate in H2 on slowing inflation

Nigeria’s fixed income market has had a bullish run since 2024, which seems to be coming to an end with analysts forecasting a moderation in yields even as the government continues its significant domestic borrowing drive.

While current yields may appear attractive, experts caution that the persistent effect of inflation makes shorter-dated bonds a more prudent investment.

Performance in half year 2025

The Nigerian government has raised N10.67trillion in domestic financing through Treasury bills (N7.89trillion), FGN bonds (N2.48trillion), and Sukuk bonds (N300billion) as of May 2025.

This already represents a significant portion of the proposed NGN13.09trn 2025 budget deficit based on the oil price and production benchmarks of USD75/pb and 2.01mbpd, respectively.

In the first half of 2025, Nigeria’s fixed income market experienced a decline in yields driven primarily by the drop in inflation rates and the Central Bank of Nigeria’s (CBN) decision to hold interest rates.

In May 2025, Moody’s upgraded Nigeria’s credit rating from Caa1 to B3, citing improvements in external reserves and relative fiscal discipline. While the outlook remains stable, the upgrade reflects measured confidence in Nigeria’s efforts to strengthen its macroeconomic fundamentals even as vulnerabilities, particularly its dependence on oil, persist.

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Bonds

In December 2024, short-term bond yields—particularly for maturities in 2026 and 2027 traded above 22 percent to 25 percent, while long-dated bonds hovered closer to 15 percent to 17 percent.

The short-term instrument offered higher returns because of heightened concerns about near-term risks, including high inflation, exchange rate volatility, and tighter monetary policy.

As of June 2025, yields declined across almost all maturities, with the most pronounced drop at the short end of the curve, particularly for 2026 to 2030 maturities.

This is as a result of improved macroeconomic conditions such as cooling inflation, stable inflation, and expectation of an accommodative monetary policy stance.

Outlook for fixed-income H2 2025

The recent uptick in global oil prices, now hovering around $78–80 per barrel, offers a near-term lifeline to Nigeria’s fiscal position.

According to analysts at Meristem, a wealth management firm, if sustained, this could help offset prior underperformance in revenue and potentially narrow the projected budget deficit, assuming production volumes do not deteriorate further.

“ However, with oil output still averaging below target (around 1.47–1.50mbpd), Nigeria may not fully capitalise on the price rally. Hence, the full-year deficit is still likely to overshoot the target, potentially landing between N20-23 trillion,” analysts at Meristem said.

The fiscal pressures, though eased slightly, will still require increased borrowing in the remaining half of 2025 to plug gaps and fund capital projects.

“ As such, if the government sustains sourcing funds from the domestic market, yields are likely to increase moderately, particularly at the long end of the curve (bonds)due to duration and credit risk concerns,” an analyst at Meristem said.

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However, it mentioned that two moderating factors could temper yield increases: A dovish or neutral CBN stance, especially if inflation continues its downward trajectory, and improved investor sentiment due to the oil price rally and external rating upgrade.

Headline inflation is expected to slow modestly by December, supported by stronger food harvests, waning FX passthrough, and high base effects from the prior year’s reforms.

Meristem recommends investors heavily invest in short-duration instruments (including participating in Treasury bills auctions and buying short-dated bonds) for safety and capital preservation, with smaller, selective longer-duration exposure for attractive yield capture.

“ Overall, we expect a sustained yield moderation by the end of 2025, as inflation decelerates, real yields, especially on treasury bills, are expected to turn marginally positive,”

“We forecast long tenor T-bill rates to stabilise between 21 percent and 22 percent, while benchmark FGN bond yields should consolidate around 17 percent,” Zedcrest said.