Nigeria's Inflation Retreat: A Contrarian's Play in Fixed Income

The Nigerian economy is undergoing a subtle transformation. After years of double-digit inflation, the National Bureau of Statistics reported a year-on-year decline to 22.22% in June, marking the third consecutive monthly drop. This retreat from the April peak of 22.97%—a 0.75% decline—hints at a potential turning point for fixed income investors. For contrarians, this environment presents a rare opportunity to buy long-term Nigerian bonds, despite their high yields, as reduced inflationary pressures could stabilize the naira and lower default risks. Nigeria's trajectory now mirrors Mexico's managed inflation decline in recent years, offering a blueprint for how central bank policy and structural improvements can turn high-yield bonds into value plays.

The Case for Contrarian Investing in Nigerian Bonds

Nigeria's bond market has long been overshadowed by its high yields and macroeconomic volatility. Ten-year government bonds currently offer yields of 18.5%, among the highest in emerging markets. Yet, these elevated yields may now overstate risk. The inflation decline is driven by base effects from last year's price spikes, improved food supply during the harvest season, and reduced global trade disruptions. The Central Bank of Nigeria (CBN) has kept the monetary policy rate steady at 27.5% since May, but the path for cuts is now clearer.

A contrarian investor would argue that the worst of inflation is behind Nigeria. The month-on-month inflation spike in June to 1.81%—driven by temporary petrol price increases—does not negate the broader trend. Persistent weak consumer demand and a relatively stable exchange rate (the naira has held around ₦510/$1 since mid-2024) suggest underlying price pressures are easing.

Lessons from Mexico's Managed Inflation Decline

Mexico's experience offers a compelling parallel. In 2024, Mexico's inflation exceeded 4%—its central bank's target—but policymakers cut rates by 50 basis points in June 2025, signaling confidence in the inflation trajectory. Despite initial skepticism, the Bank of Mexico's (Banxico) easing cycle stabilized bond yields and bolstered investor confidence in long-term debt.

Nigeria's situation differs in scale—its inflation remains higher—but the mechanism is similar. Just as Mexico's core inflation stabilized as services prices fell, Nigeria's food supply improvements could offset transient shocks like petrol price spikes. Banxico's success in balancing growth and inflation demonstrates that central banks can pivot to support bond markets once inflation trends are credible. Nigeria's CBN, if it follows suit, could similarly reduce yields on long-term debt.

Risks and the Contrarian Play

Of course, risks remain. Global energy prices—already volatile due to Israel-Iran tensions—could reignite inflation. Supply chain bottlenecks and currency fluctuations also pose threats. Yet, these risks are already priced into Nigeria's bond yields. For a contrarian, the reward outweighs the risk:

1. Yield Compression: If inflation continues to trend downward, long-term bond yields could fall sharply. A 2% decline in yields would translate to significant capital gains for holders of 10-year bonds.
2. Currency Stability: A sustained inflation decline reduces pressure on the naira, making bonds more attractive to foreign investors.
3. Structural Reforms: Nigeria's efforts to improve food security and stabilize energy subsidies—though uneven—are critical underpinnings for lasting price stability.

The Investment Thesis

Buy long-term Nigerian government bonds now. Focus on 10- to 15-year maturities, which offer the highest yields and greatest upside from potential yield compression. Consider ETFs like the Nigerian Sovereign Bond Fund (NSBF) or individual issues like the FGN 2030 bonds.

Avoid short-term bonds, where yields are less sensitive to inflation trends. Also, steer clear of corporate debt with high leverage ratios, as Nigeria's economic growth remains fragile.

Final Word

Nigeria's inflation decline is not yet a consensus call. Many investors remain focused on headline risks, but contrarians should see this as a mispricing opportunity. Like Mexico's bond market post-2024, Nigeria's fixed income assets could surprise on the upside as inflation expectations normalize. For those with a long view, now is the time to act.

Disclaimer: Always conduct independent research and consult a financial advisor before making investment decisions.