As yields on Nigerian fixed-income instruments moderate from their 2025 highs, the inclusion of short-term government securities under the 10 percent withholding tax regime is beginning to weigh more on investor returns, sharpening sensitivity to net yields and reshaping demand at primary market auctions.
“The inclusion of short-term government securities under the withholding tax regime is expected to reduce after-tax yields, prompting investors to demand higher gross yields at primary market auctions to preserve real returns,” Meristem Research said in its 2026 outlook report.
Nigeria’s Treasury bill market has historically been responsive to shifts in monetary policy and liquidity conditions. At the start of 2025, aggressive tightening by the Central Bank of Nigeria (CBN) pushed yields sharply higher, with the 364-day Treasury bill peaking at 22.62 percent in January. At those levels, the impact of a 10 percent tax on interest income was less pronounced, as investors were still locking in strong nominal returns.
That buffer has since narrowed. By July 2025, the 364-day Treasury bill yield had declined to about 15.88 percent before recovering modestly toward the end of the year.
As of January 2026, yields stood at roughly 15.30 percent for the 91-day bill, 15.50 percent for the 182-day bill and 17.95 percent for the 364-day bill. While these rates remain elevated by longer-term standards, the same withholding tax now consumes a larger share of interest income in absolute terms, compressing post-tax returns.
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Under Nigeria’s tax framework, withholding tax is charged on the gross interest earned on most securities at the point of payment. An 18 percent Treasury bill yield, once taxed at 10 percent, delivers an effective return of 16.2 percent.
At a 15 percent yield, the same tax reduces returns to 13.5 percent, materially lowering after-tax carry, particularly in an environment where inflation remains elevated.
Meristem noted in their 2026 outlook report that as yields become more compressed, investor behaviour is adjusting accordingly.
“Following the inclusion of short-term government securities under the WHT regime, T-bill rates are expected to continue their upward trajectory as yield-sensitive investors adjust expectations to preserve real returns,” the firm said, adding that longer-dated, tax-exempt instruments could attract increased demand.
This shift is increasingly evident in the bond market. Current yields on Federal Government of Nigeria bonds stand at about 16.77 percent for the two-year tenor, 17.07 percent for the five-year and 16.86 percent for the 10-year bond.
Interest income on FGN bonds remains exempt from withholding tax, improving their relative attractiveness for investors seeking stable after-tax income without taking on additional credit risk.
Cordros Securities, in its 2026 outlook, expects this preference to persist. “With the introduction of the 2026 capital gains tax regime and an existing 10 percent withholding tax on short-term instruments, investors are likely to favour FGN bond instruments for their superior after-tax carry,” the firm said, noting that mid-term maturities may attract stronger positioning than the short end of the curve.
Money market funds and commercial paper continue to offer comparatively high nominal yields. Average returns on naira-denominated money market funds are currently estimated at between 20 and 23 percent, while recent commercial paper issuances have offered yields ranging from about 23 percent to as high as 31 percent, depending on tenor and issuer quality.
Even in these segments, however, investors are paying closer attention to net yields as tax considerations become harder to overlook.
Broader market conditions suggest that the evolving tax-yield dynamic is influencing allocation decisions rather than triggering an exit from naira assets. The naira appreciated by about 7.5 percent in 2025 following foreign exchange reforms, while the Nigerian equity market delivered a 51.2 percent return over the year, drawing strong local and foreign participation.
Ultimately, while the withholding tax itself is neither new nor uniform across all instruments, its interaction with a changing yield environment is reshaping how investors assess returns.
As yields settle below last year’s extremes, attention is shifting from the structure of the tax to its practical effect on income, reinforcing the role of market cycles in shaping the real impact of fiscal policy.
