High bond yields to persist until Q4 amid inflation

Nigeria’s debt market is under pressure from widening fiscal deficits, tight monetary policy and persistent inflation. As high yields endure, investors are abandoning traditional buy-and-hold strategies in favour of flexible, short-duration bond positions, writes JIDE AJIA

Fixed-income investors in Nigeria have been advised to brace themselves for a prolonged period of high interest rates, as financial experts project that any meaningful reversal in Federal Government bond yields is highly unlikely before the final quarter of 2026.

According to the latest macroeconomic insights, the domestic debt market will remain heavily skewed towards elevated yields due to a combination of rigid macroeconomic pressures, strict regulatory adjustments, and ongoing volatility in both the domestic and global inflation landscapes.

For institutional fund managers and retail investors alike, this high-yield environment presents a double-edged sword: highly attractive nominal returns on short-term instruments, juxtaposed against severe inflationary erosion that continues to challenge positive real yields.

As the macroeconomic landscape shifts, navigating the fixed-income curve has become a test of tactical patience.

Policy fuels yields

According to a comprehensive macroeconomic report released by Coronation Asset Management, the domestic debt market is expected to maintain its elevated posture for the foreseeable future.

The asset management firm noted that market analysts predict any significant reversal in Federal Government bond yields is highly unlikely to occur before the final quarter of 2026, meaning fixed-income investors should brace for an extended cycle of high borrowing costs.

This environment is deeply tied to the Central Bank of Nigeria’s sustained hawkish monetary stance. Over the past several quarters, the apex bank has aggressively utilised orthodox monetary policy tools to combat money supply growth, deploying frequent Open Market Operations and expanding treasury bill auction volumes to mop up excess banking system liquidity.

Concurrently, the Debt Management Office faces intense pressure to plug fiscal deficits by meeting the Federal Government’s substantial domestic funding requirements. This relentless supply of government paper continues to push sovereign borrowing costs upward.

Coronation analysts concluded that until headline inflation establishes a clear downward trajectory and fiscal borrowing appetites normalise, the fixed-income yield curve will firmly favour the buyer well into the latter half of the year.

The broader global backdrop provides a volatile, mixed canvas for domestic policy trackers trying to gauge imported inflation.

A June 2026 macroeconomic update from Meristem Research highlighted temporary international relief earlier in the season as global energy costs briefly eased following a critical United States-Iran ceasefire. This diplomatic breakthrough pushed Brent crude prices down by 17.94 per cent month-on-month to $84.34 per barrel in June

The ripple effect was immediately visible in the Euro Area, where inflation slowed to 2.80 per cent year-on-year in June, aided by a drop in energy inflation to 8.70 per cent.

However, Meristem analysts warned that this relief might be short-lived for developing economies like Nigeria. The sudden re-escalation of the US-Iran conflict has already reignited upward pressure on global oil prices, threatening a sharp reversal of June’s global disinflationary progress.

With geopolitical flashpoints flaring up again, global energy-driven inflation risks are compounding, making it increasingly difficult for central banks worldwide to pivot towards looser monetary policy.

Domestic inflation pressures

Locally, Nigeria’s internal battle against rising prices remains fierce, deeply complicating the interest rate outlook.

Historical data released by the National Bureau of Statistics showed that Nigeria’s headline inflation rose 15.93 per cent year-on-year in May 2026, marking its third consecutive monthly increase.

This uptick was propelled by food inflation accelerating  16.96 per cent year-on-year and core inflation climbing 16.82 per cent year-on-year, driven by high domestic transportation costs and structural supply chain disruptions affecting major market staples like tomatoes, yam tubers, and onions.

For the June 2026 numbers, Meristem projected headline inflation to edge slightly higher to 15.95 per cent year-on-year, underscoring the sticky nature of domestic food supply constraints. However, a major domestic cushion emerged from the local energy sector.

Following the temporary drop in global crude prices and the reopening of the Strait of Hormuz, the Dangote Refinery slashed its ex-depot Premium Motor Spirit price three times, delivering a cumulative reduction of N150 to land at N1,125 per litre.

While this petrol price drop, coupled with a marginally stronger official naira average of N1,366.99/$, is expected to temper core inflationary distribution costs, a sharp surge in Liquefied Petroleum Gas (cooking gas) prices remains an upside risk.

Income portfolio positioning

While the fixed-income market remains locked in a high-interest phase, Nigeria’s broader financial space has opened the year on starkly contrasting notes.

The Nigerian Exchange Limited has experienced historic bull runs, with the All-Share Index crossing unprecedented milestones, driven by aggressive domestic institutional investors rotating capital into high-value equities to hedge against inflation. Yet, for conservative, income-focused portfolios, fixed income remains the dominant portfolio anchor.

To navigate this high-yield, high-inflation environment, Coronation’s investment analysts recommended a tactical approach geared strictly towards capital preservation.