The yield puzzle: Why investors are demanding higher returns
Nigeria’s fixed-income market has witnessed a notable repricing in recent weeks. After declining steadily between March and May, yields at both the primary and secondary markets have moved higher, with the stop rate on the benchmark 364-day Treasury bill rising from 16.15 percent in May to 17.34 percent in June.
At first glance, the development appears puzzling. System liquidity remains elevated, external reserves have improved, and inflation remains significantly lower than levels recorded a year ago. Yet investors are demanding higher returns on government securities.
The answer lies in a combination of government borrowing expectations, renewed inflation concerns, and a global interest-rate environment that remains restrictive.
One of possible explanations for the recent rise in yields is that investors may have been pricing in the government’s borrowing programme. The Federal Government’s 2026 budget projects total expenditure of N68.3 trillion and a fiscal deficit of N23.8 trillion. To finance part of this deficit, the government plans to raise approximately N19.47 trillion from the domestic market.
As of May, the government had raised roughly N7.15 trillion, implying that it still needed to raise about N12.32 trillion between June and December. This translated to an average monthly borrowing requirement of approximately N1.75 trillion for the remainder of the year, significantly higher than the average pace of N1.43 trillion recorded during the first five months of the year.
Faced with the prospect of increased sovereign issuance, investors began demanding higher compensation before committing funds. This was reflected in the Treasury bill market, where the stop rate on the benchmark 364-day bill rose sharply from 16.15 percent in May to 17.34 percent in June. Bond yields also trended higher, with average yields in the secondary market rising to around 17.45 percent, while Treasury bill yields approached 18.86 percent.
However, the picture changed considerably by the end of June. Cumulatively, the Debt Management Office (DMO) had raised approximately N4.67 trillion through FGN bond issuances and N7.67 trillion through Treasury bill issuances between January and June, bringing total domestic borrowing to N12.34 trillion. This translates to an average borrowing pace of about N2.06 trillion per month during the first half of the year, well above the pace recorded as of May.
Consequently, the government’s remaining domestic borrowing requirement has fallen to about N7.13 trillion, equivalent to an average monthly borrowing need of approximately N1.19 trillion between July and December.
Inflation expectations have also played a role. Headline inflation rose from 15.06 percent in February to 15.93 percent in May, raising concerns that the disinflation trend may be slowing. Fixed-income investors pay close attention to inflation because it erodes the real return on their investments. When inflation expectations rise, investors typically demand higher nominal yields to preserve purchasing power.
The global environment has equally contributed to the upward movement in yields. Across major economies, bond yields have remained elevated as investors reassess the outlook for inflation and interest rates. In the United States, the Federal Reserve has maintained a cautious stance, signalling that interest rates may remain higher for longer than previously anticipated. This has pushed up global yields and increased the return threshold demanded by investors in emerging and frontier markets, including Nigeria.
Despite the recent rise in yields, there are reasons to believe that some of the pressure could ease in the months ahead. June’s aggressive issuance programme has significantly reduced the government’s remaining domestic borrowing requirement. With total domestic borrowing already standing at N12.34 trillion, only about N7.13 trillion remains to be raised to meet the government’s planned borrowing target for the year. This implies a monthly borrowing requirement of approximately N1.19 trillion between July and December, significantly lower than the pace required as of May.
According to the Debt Management Office’s issuance calendars for Treasury bills and FGN bonds, approximately N6.95 trillion is expected to be raised over the next three months. If issuance proceeds broadly in line with the published programme, concerns about future supply could begin to ease by the end of the third quarter, as a substantial portion of the government’s planned domestic borrowing requirement would have been met.
This is important because one of the factors driving the recent rise in yields appears to be investors’ expectations regarding future government borrowing. As the borrowing programme progresses and uncertainty around future supply reduces, that source of upward pressure on yields could gradually diminish. If inflation expectations moderate and global interest-rate pressures ease, yields could stabilise or even decline from current levels.
Looking ahead, market participants should closely monitor three key variables: the government’s borrowing programme, the trajectory of inflation, and developments in global interest rates. Together, these factors will determine whether the recent rise in yields proves temporary or marks the beginning of a more sustained upward trend.
