Nigeria’s fixed-income market, where the government raises funds through bonds and treasury bills, is regaining strength, with investor demand holding firm despite the recent easing of the Monetary Policy Rate (MPR).
The rebound has been supported by easing inflation, improved foreign reserves, a stable naira, and renewed confidence following the Central Bank’s first interest rate cut in five years.
A new report by Rhodium Capital Research notes that these gains could set the stage for stronger performance in the final quarter of 2025, provided the government maintains fiscal discipline and the broader economy remains stable.
Inflation eases, confidence builds
After two years of relentless price increases, inflation is finally cooling. It slowed to 20.12 percent in August, from 21.88 percent in July, giving the Central Bank of Nigeria (CBN) room to lower borrowing costs.
In September, the CBN cut its benchmark interest rate by 50 basis points, the first reduction in five years. Though modest, the move signaled confidence that inflation pressures are easing and helped lift investor sentiment.
At the same time, Nigeria’s foreign reserves rose to $42.35 billion, the highest level since 2023. This improvement has supported the naira and renewed foreign investor interest in government securities.
“These are early signs of balance returning,” Rhodium Capital noted. “Liquidity is improving, inflation is slowing, and investors are beginning to look beyond the short term.”
Bismarck Rewane also shared a similar outlook, predicting that “Nigeria’s inflation rate could slide to 18 percent by November,” while warning that external pressures like global commodity trends could still test the CBN’s progress.
From uncertainty to renewed interest
The rebound follows a turbulent first half of the year, when uncertainty over government borrowing and exchange rate instability kept investors cautious.
By the end of the third quarter, however, average bond yields had eased to around 16.4 percent, while Treasury bill rates also declined as investors sought to lock in attractive returns ahead of further monetary easing.
Still, analysts warn that the recovery remains fragile. Heavy government borrowing could reverse the progress if new debt issuance expands too aggressively.
“Everything depends on fiscal discipline,” said one Lagos-based portfolio manager. “If borrowing rises sharply, yields could climb again, taking us back to where we started.”
Paul Alaje, Chief Economist at SPM Professionals, echoed that concern, noting that Nigeria’s public debt could rise to ₦200 trillion by 2027 if current borrowing continues unchecked. “We might return to spending up to 90 percent of government earnings on debt service,” he cautioned.
Investors adjust their strategy
With inflation softening and interest rates declining, institutional investors, especially pension funds are shifting to medium- and long-term bonds, betting on price gains as yields gradually fall.
Bonds maturing between 2029 and 2038 are currently attracting strong interest, offering both stable income and potential capital appreciation.
Short-term instruments like Treasury bills remain popular among investors who prefer quick, low-risk returns. However, analysts caution that those yields could compress quickly if market sentiment continues to improve.
“Short-term bills are a safe haven for liquidity,” said Oyekan Idris, a capital market analyst. “But for stronger value, investors should start building positions in longer-dated bonds.”
New forces shaping the market
Beyond monetary policy, fresh developments are influencing Nigeria’s fixed-income outlook.
Recent National Pension Commission (PenCom) reforms now allow pension funds to diversify into infrastructure-backed and foreign-currency assets. This could deepen the market and sustain long-term demand for government bonds.
There is also growing interest in sustainability-linked investments, as fund managers explore opportunities in green bonds and climate finance, aligning portfolios with Nigeria’s transition toward cleaner energy sources.
Gita Gopinath, First Deputy Managing Director of the International Monetary Fund (IMF), recently noted that while Nigeria’s debt level remains “moderate and not at high risk,” maintaining policy discipline will be essential to sustain investor confidence.
Risks that could test the recovery
Despite the improving tone, risks remain significant. Oil, still Nigeria’s main revenue source, could swing sharply in price, affecting foreign reserves and fiscal stability.
External conditions are another threat. Possible U.S. interest rate hikes or global market tightening could divert funds from emerging markets like Nigeria. At home, any policy missteps in managing debt or inflation could quickly unsettle investors.
“We’re on a recovery path, but it’s a narrow one,” said another analyst. “It wouldn’t take much to upset the balance.”
Looking ahead
For investors, the final months of 2025 may not bring spectacular gains, but they could offer something long absent, predictability.
After two volatile years, Nigeria’s fixed-income market is showing signs of stability. Inflation is slowing, liquidity is improving, and institutional confidence is returning.
That combination could make the last quarter of the year one of the most stable periods for bond investors in recent memory.
“Investors who remain disciplined, balancing long-term positions with short-term liquidity are likely to be rewarded,” Rhodium Capital concluded. “Patience will be key.”
