Nigerian Bonds Lead EM Returns as OMO Bills Fuel Carry Trade Outlook

Nigerian domestic bonds are the best performers compared to emerging market (EM) peers as elevated yields on open market operations (OMO) bills are seen maintaining the carry trade, despite central bank (CBN) rate cuts.

“The OMO trade still looks attractive in our view as it continues to be supported by favorable naira dynamics,” Citigroup Inc. strategist Katie Kironde wrote in a client note.

Nigerian naira bonds have returned 18.65% in the second half of 2025, compared to 14.77% for Colombia, 11.31% for Egypt, 10.93% for South Africa and an EM average of 0.44%, according to Bloomberg data.

The Central Bank of Nigeria, which cut its benchmark policy rate last month for the first time in five years, saw strong demand at the auction it held on Friday.

The CBN offered a total of N600 billion at its OMO auction last week, across the 193-day and 249-day maturities.

Demand was strong, with total subscriptions reaching N2.1 trillion. Consequently, the CBN allotted the full N2.1 trillion at stop rates between 19.40% and 19.90%.

Similarly, the bond market traded on a mixed but slightly bullish tone, as the average yield moderated by 1bp to 15.89% from 15.89% previously.

Gains were largely supported by interest in long-dated instruments, with yield declines recorded in JUN-38 (-21bps), JUN-32 (-16bps), and MAR-35 (-14bps). However, mild profit taking was seen in MAY-33 (+11bps), APR-49 (+10bps), and JUN-33 (+7bps).

There have been concerns that declining yields will deter foreign investors, who have helped support the naira by snapping up domestic paper issued by the central bank and the government.

Citi’s Kironde acknowledged the CBN was expected to reduce rates further, but projected only small reductions as policy makers remain cautious about price pressures.

Inflation slowed to 18% in September, taking it below 20% for the first time in three years, and analysts expect the CBN will cut rates again at its meeting next month.

The appeal of local debt will depend on the continued supply of high-yield OMO bills, said Samir Gadio, head of Africa strategy at Standard Chartered Plc.

“A lack of OMO supply, maturities and excess liquidity could otherwise push yields even lower and make it harder for foreigners to position for still-decent carry returns,” he said.

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