Bond yields advance as investors price in increased government borrowing

Nigeria’s sovereign bond yields are expected to remain elevated through the third quarter of 2026 as investors factor in increased government borrowing, rising inflation, and a prolonged tight monetary policy environment, according to a new report by Coronation Research.

The investment research firm said the federal government’s decision to double its June bond offer to N1.2 trillion from N600 billion at the previous auction marked a turning point in domestic debt issuance, signalling stepped-up financing needs and prompting investors to demand higher returns on longer-dated securities.

“June marked a sharp reversal as the Debt Management Office doubled the offer size to N1.2 trillion, its largest single bond auction of the year and a clear signal of stepped-up domestic financing needs,” Coronation said.

“With investors asked to absorb twice the volume they had grown accustomed to, the market demanded a higher yield to clear the larger supply.”

The Debt Management Office offered the bonds through the reopening of the February 2035 and April 2037 Federal Government of Nigeria instruments.

Investor demand remained strong, with subscriptions rising to N1.41 trillion from N796.17 billion recorded at the previous auction, while total allotments stood at N1.22 trillion.

Coronation attributed the strong participation largely to elevated system liquidity and sustained demand from domestic institutional investors, particularly pension fund administrators.

Despite the strong auction demand, the secondary bond market remained under pressure as investors continued to reprice government securities amid expectations of increased borrowing.

Coronation said bearish sentiment persisted across the yield curve, with benchmark yields moving higher as sell-side pressure intensified across short-, medium-, and long-term maturities.

According to the report, the repricing reflects three key developments: a renewed rise in inflation after three consecutive monthly increases, expectations that the Central Bank of Nigeria will maintain its tight monetary policy stance, and growing fiscal financing needs following the expansion in domestic bond issuance.

Headline inflation accelerated to 15.93 percent in May from 15.69 percent in April and 15.38 percent in March, reversing the disinflation trend recorded through much of 2025.

Coronation said the inflation outlook has weakened expectations of near-term interest rate cuts, leading investors to demand higher real returns on long-dated government securities.

The report also noted that the Federal Government has already raised about N19.03 trillion through Treasury bills and FGN bond issuances this year, representing 65.17 percent of its 29.20 trillion domestic borrowing target for 2026.

With the budget projecting a fiscal deficit of N31.46 trillion, the research house expects issuance volumes to remain elevated in the coming months.

Looking ahead, Coronation expects FGN bond yields to remain within a 17.5 percent to 19 percent range through the third quarter, barring a sustained decline in inflation or an earlier-than-expected shift in the Central Bank’s monetary policy stance.