Bond Yields Fall to 20% Amid Inflation Adjustment: A Flashback and Reflection on Market Reactions

Revisiting the Fixed Income Surge: How Inflation Trends Reshaped Investor Sentiment

In a significant shift within Nigeria’s fixed-income market, the average yield on government bonds contracted to 20%, driven by a wave of investor interest following the release of the January 2025 Consumer Price Index (CPI) report. The bullish momentum in the secondary market was fueled by optimism surrounding inflation data and shifting monetary policy expectations.

Analysts at CardinalStone Limited, in an investor note, highlighted the increased participation in the bond market, attributing it to the real return on fixed-income securities turning positive at 3.02%. This shift followed the National Bureau of Statistics’ (NBS) rebasing of the CPI, which saw Nigeria’s headline inflation rate moderate to 24.48% in January, down from 34.80% in December 2024.

Market Reflection: Inflation’s Role in Bond Yields

The rebasing exercise led to a recalibration of inflation figures, with core inflation easing to 22.6% from 29.3%, and food inflation falling sharply to 26.1% from 39.8%. This development prompted traders to reassess their strategies, spurring increased buying pressure on government bonds, particularly in the mid-term segment.

Notably, investors showed heightened interest in the 2027, 2029, and 2033 Federal Government of Nigeria (FGN) bonds, compressing yields across the curve. The short end of the yield curve saw a decline of 31 basis points (bps), while the mid-segment dropped by 2 bps, largely influenced by strong demand for MAR-2027 (-75bps) and JUL-2030 (-30bps) instruments.

A Retrospective on Market Confidence

At the peak of this bullish sentiment, traders observed a 95 bps drop in the 2035 FGN bond yield, closing at 20.55% on bid. The impact was most pronounced in the short- and mid-term securities, where investors repositioned in anticipation of further economic adjustments. The 2029 and 2031 papers saw moderate buying interest, solidifying confidence in Nigeria’s fixed-income market amid monetary policy recalibrations.

This shift in bond yields serves as a reminder of how inflation data and monetary policy dynamics continue to shape investment flows, reinforcing the interplay between macroeconomic fundamentals and market performance. As Nigeria prepares for the next monetary policy meeting, investors remain watchful, evaluating potential rate adjustments and their impact on future yields.

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