FG’s record borrowing pushes bond yields higher as investors demand bigger returns

The Federal Government’s aggressive domestic borrowing programme is pushing up the cost of raising debt, as investors demand higher returns ahead of what is expected to be one of Nigeria’s biggest sovereign debt issuance programmes in recent years.

Average yields on Federal Government of Nigeria (FGN) bonds climbed 148 basis points to 17.79 percent in June, extending the sell-off in the secondary market as investors repriced government securities amid expectations of significantly higher bond supply.

The pressure stems from the government’s N34.5 trillion fiscal deficit for 2026, with about N29.2 trillion expected to be financed through domestic borrowing.

Those expectations intensified after the Debt Management Office (DMO) offered N1.2 trillion at its June bond auction, the largest single auction on record before unveiling plans to raise between N3.8 trillion and N4.9 trillion in the third quarter, significantly above the roughly N2.5 trillion offered in the previous quarter.

The repricing was broad-based across the yield curve. Mid-tenor bonds recorded the steepest increase, with yields rising 158 basis points month-on-month, while short- and long-dated securities gained 144 basis points and 142 basis points, respectively. Marginal rates on the August 2030 and June 2032 bonds also rose to 16.30 percent and 16.50 percent from 16.00 percent and 16.15 percent at the previous auction.

The sell-off spread across the fixed-income market, with average Nigerian Treasury Bill (NTB) yields climbing 103 basis points to 18.54 percent, while average Eurobond yields rose 76 basis points to about 7.54 percent as global investors turned more cautious amid renewed geopolitical tensions in the Middle East and persistent global uncertainty.

Read also: Why Nigeria is looking beyond Eurobonds for foreign financing

Analysts say the sharp rise in domestic yields reflects investors pricing in the large volume of government securities expected to enter the market over the coming months.

Emmanuel Orji, a fixed-income dealer, said the market is currently being driven by two opposing forces, improving macroeconomic fundamentals and a sharp increase in government debt issuance.

“The irony is that the same decline in oil prices supporting disinflation also weakens government revenue,” Orji said.

According to him, lower inflation and a relatively stable naira would ordinarily support lower bond yields, but the government’s expanded borrowing programme is likely to dominate market pricing in the near term.

“When borrowing requirements become this large, investors regain pricing power,” he said.

Orji expects bond yields to move towards, and potentially exceed, 19 percent during the third quarter as the market digests the increased issuance, before easing later in the year if inflation continues to moderate.

He summed up the outlook by saying, “Supply pressure wins the auctions; fundamentals win the year.”

Not everyone believes the increase in government borrowing will immediately squeeze financing for the private sector.

Titilayo Daramola, a fixed-income trader, said current yield levels are creating attractive opportunities for investors, while liquidity in the financial system remains strong enough to absorb the additional supply.

“I believe it will create an attractive buying opportunity for investors and not crowd out the private sector just yet because there’s a lot of capital out there looking for where to be deployed,” Daramola said.

According to her, robust subscription levels across recent government debt auctions indicate that investors still have ample liquidity to invest despite the increase in issuance.

“We see that evident in the subscription levels across different issuances, meaning there’s a growing need for where to deploy funds,” she said.

Daramola added that current yields remain below the highs seen earlier this year when Treasury bill discount rates traded above 20 percent, suggesting the market has previously absorbed even higher interest-rate environments.

Looking ahead, analysts expect supply pressures to remain elevated. Besides the DMO’s planned bond issuance of up to N4.9 trillion in the third quarter, the Central Bank of Nigeria has scheduled N5.8 trillion in Treasury bill issuances during the period against expected maturities of N2.6 trillion, indicating that government securities will continue to dominate the domestic fixed-income market.

While easing inflation could eventually create room for lower yields, market participants say the government’s sizeable borrowing requirement is likely to keep borrowing costs elevated in the near term as investors continue to demand higher returns to absorb the increased supply of debt.