Nigeria Bonds Rally On Softer CPI And Liquidity

Nigeria’s sovereign curve extended a broad rally as Treasury-bill and Federal Government bond yields fell across tenors in mid-October 2025, aligning with the Central Bank of Nigeria’s 50bp cut to the Policy Rate to 27.00% on 23 September and a sixth consecutive month of disinflation. The 10-year benchmark traded near 15.6% on 14–17 October, down from about 16.2% at the start of the month, while the 364-day NTB cleared near 16.8% at the 8 October auction, with secondary prints around the mid-16% range.

Headline CPI eased to 18.02% year on year in September from 20.12% in August, sharply below the peak near 35% in December 2024 following the statistical recalibration. The yield shift is consistent with lower money-market benchmarks, moderating inflation expectations, and a narrower currency risk premium.

Policy transmission is evident across funding, term premia, and FX channels. The MPR reduction compressed front-end funding rates and lowered the marginal return demanded for holding bills, while the disinflation run-rate cut the compensation embedded in longer tenors, allowing a modest bull-flattening as duration risk became more defensible. FX volatility receded as the official USDNGN rate held around ₦1,460–₦1,490 in mid-October versus wider bands earlier in 2025, with improved market depth and a smaller gap to parallel quotes. Reduced FX variance tightens local risk premia and supports real-money bids for the belly and long end, amplifying price discovery at auctions and in the secondary market.

Macro arithmetic sets the bounds of the rally. Total public debt stood at ₦152.4 trillion as at 30 June 2025, with the latest GDP baseline placing the debt ratio near the mid-30s percent in 2025; the constraint remains debt-service-to-revenue rather than stock metrics. A 100bp fall in average naira funding costs on the domestic portfolio implies tens of billions of naira in annual interest relief, conditional on tenor mix and rollover cadence.

External buffers strengthened: gross reserves rose to roughly $42–43 billion in September, reinforcing the currency band and easing FX-implied risk premia in naira bonds. Growth prospects are moderate: real GDP is projected around 3.9% in 2025 and just above 4% in 2026, with upside contingent on oil output trending toward 1.6 mb/d and power-supply reliability stabilising manufacturing throughput.

Peer context indicates repricing without exuberance. Kenya’s 10-year trades in the mid-teens, while Egypt’s remains around 20–21% as elevated inflation and fiscal needs demand higher real compensation. Against the U.S. 10-year near 4%, Nigeria’s long-end spread still embeds sizable premia for inflation, FX, and policy risk. The local rally has tightened cross-currency funding as Eurobond indications firmed alongside naira bonds, narrowing the basis for sovereign borrowing. For corporates, lower sovereign yields can reopen the naira primary market for high-grade issuers, compressing spreads and reducing reliance on short-tenor bank lines. For banks, treasury-book repricing could trim net interest margins but should reduce mark-to-market volatility if the curve continues to roll down without FX dislocations.

Flows remain decisive. Foreign portfolio participation is rebuilding from a low base; domestic pensions and insurers continue to anchor demand across the belly and long end as issuance calendars normalise. Sustaining compression requires predictable primary issuance, open-market operations calibrated to system liquidity, and consistent FX market depth. Any reversion to ad-hoc liquidity mop-ups, opaque auction practice, or widening FX spreads would quickly re-steepen the curve and lift term premia, particularly if oil prices weaken or crude production underperforms planned volumes.

The forward read is measurable and time-bound. Through Q2 2026, confirmation requires three thresholds: headline CPI trending toward ≤16% with food inflation decisively lower; USDNGN=X contained within a ±5% band around ₦1,470 with gross reserves ≥$42 billion; and 364-day NTB clearings at or below 16% alongside a 10-year yield at or below 15% without disorderly parallel-market slippage.

If these conditions hold, an additional 100–150bp at the long end is plausible, lowering sovereign funding costs and crowding in private credit. Failure—via oil-price volatility (CL=F), fiscal overruns, or renewed FX scarcity—would mark the move as cyclical rather than structural and reprice risk premia accordingly.