Strong investor demand is helping the government finance its deficit, but high yields are raising concerns about debt costs and private-sector credit

The Federal Government has raised nearly N7.2 trillion through domestic bond auctions in 2026, intensifying its reliance on Nigeria’s financial markets to finance a large fiscal deficit while investors weigh attractive government yields against the potential impact on private-sector credit.

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The latest figures, based on Debt Management Office auction data and analysis by Quest Merchant Bank, show the scale of the government’s domestic funding drive as the Federal Government works towards a budget deficit of about N31.5 trillion.

The DMO publishes monthly auction results and maintains the government’s domestic bond issuance programme.

The N7.2tn bond borrowing represents only part of the government’s overall domestic financing programme, as it excludes funding obtained through Treasury bills, Sukuk and other instruments.

The 2026 budget envisages about N29 trillion in domestic borrowing, leaving a substantial financing requirement still to be met through the remainder of the year.

That requirement places the domestic financial system at the centre of a delicate balancing act. The government needs to raise enough money to fund its spending plans without pushing yields substantially higher or making it less attractive for banks and other investors to lend to businesses and households.

At the Federal Government’s latest bond auction, the DMO allotted N805.2 billion through competitive sales across the January 2035, April 2037 and June 2038 instruments.

When N752.3 billion in non-competitive allotments was included, total sales approached N1.6 trillion. Investor subscriptions stood at N1.7 trillion, producing a bid-to-cover ratio of 2.1 times, compared with 1.9 times at the previous auction.

The figures indicate that demand for government securities remains strong, even as the DMO appears reluctant to accept bids at yields it considers excessively expensive.

The June 2038 bond attracted the strongest demand, receiving N821.3 billion in bids against competitive allotments of N631 billion. Its marginal yield settled at 17.79 per cent, despite bids reaching as high as 19 per cent.

The January 2035 bond produced an even sharper illustration of the DMO’s approach.

Investors submitted N513.6 billion in bids for the instrument, but only N64.1 billion was allotted competitively. Bids ranged from 16 per cent to 22.6 per cent, while the marginal rate settled at 17.15 per cent.

The selective allotments suggest that the debt office is seeking to manage the cost of new borrowing rather than simply accepting all available demand.

That restraint could become increasingly important as the government seeks to close the gap between its current borrowing and the approximately N29 trillion domestic financing requirement contained in the budget.

Quest Merchant Bank said banks were likely to remain among the largest buyers of sovereign securities because government debt provides a liquid and relatively low-risk investment outlet for their funds.

The bank also linked the strong demand to expectations that yields may have reached their peak following recent moderation in inflation and the possibility of continued disinflation.

“We expect investor demand to remain robust, supported by easing inflation and expectations of a gradual decline in yields,” Quest Merchant Bank said.

For investors, the attraction is straightforward. Locking in yields close to 18 per cent on longer-dated government securities can provide substantial returns if inflation and interest rates subsequently decline.

For the wider economy, however, the picture is more complicated.

A sustained increase in government borrowing could absorb liquidity that might otherwise be available for corporate lending, trade finance and consumer credit.

The effect could be particularly significant for smaller businesses that already face elevated borrowing costs and limited access to formal finance.

If banks can earn close to 18 per cent from long-term government securities while taking relatively little credit risk, lending to smaller or less-established businesses may become comparatively less attractive.

Pension funds and asset managers may similarly continue favouring government bonds as they seek to secure attractive long-term returns before yields potentially fall.

Such demand supports the government’s funding programme, but it also increases the exposure of the financial system to sovereign debt at a time when debt-service obligations remain a major pressure on public finances.

The government’s challenge is therefore becoming increasingly delicate.

It must finance a sizeable fiscal deficit while maintaining investor confidence, containing borrowing costs and ensuring that the financial system continues to provide credit to productive sectors of the economy.

The latest auction nevertheless shows that investors have not withdrawn from the sovereign debt market. Instead, the stronger bid-to-cover ratio suggests that demand remains robust, even as investors seek attractive yields and the DMO exercises greater selectivity over the cost at which it borrows.

The remaining months of 2026 will therefore test how effectively the government can navigate the competing demands of deficit financing, debt sustainability and economic growth.

With the DMO still facing a significant distance to cover against its domestic funding target, its ability to balance investor demand with borrowing costs could have consequences well beyond the government’s balance sheet.

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For Nigerian businesses and households, the critical question is whether the government’s extensive use of domestic capital will coexist with adequate and affordable credit for the private sector.