FG to borrow N800bn via February bonds amid elevated domestic borrowing costs
The Federal Government is set to raise N800bn from the domestic capital market in its February bond auction, reinforcing its aggressive borrowing costs strategy as financing pressures persist and interest rates remain elevated.
Details released by the Debt Management Office (DMO) show that the February 2026 offer will comprise three re-opened Federal Government of Nigeria (FGN) bonds across seven- and 10-year maturities.
The issuance marks a substantial increase compared to the same period last year, underscoring the government’s growing reliance on domestic debt instruments to fund budgetary obligations.
Breakdown of the February offer
According to the auction circular, the N800bn offer consists of:
- N400bn of 17.95% FGN JUN 2032 (seven-year re-opening)
- N300bn of 19.89% FGN MAY 2033 (10-year re-opening)
- N100bn of 19.00% FGN FEB 2034 (10-year re-opening)
The auction is scheduled for February 23, 2026, with settlement two days later.
The scale of the offer represents a sharp 128.6 per cent increase from February 2025, when the DMO offered N350bn across five- and seven-year instruments. In absolute terms, the year-on-year increase amounts to N450bn, signalling a more aggressive funding stance in 2026.
Although February’s N800bn issuance is N100bn lower than January’s record N900bn offer, it remains historically large for a February auction cycle.
Shift toward longer maturities
A notable feature of the February issuance is the absence of shorter-dated securities. Unlike February 2025, which included a five-year bond, the 2026 offer is concentrated entirely in seven- and 10-year tenors.
This suggests a deliberate attempt by fiscal authorities to lengthen the average maturity of domestic debt. By pushing obligations further into the future, the government may be seeking to ease short-term refinancing risks and smoothen its debt redemption profile.
Debt analysts say the strategy reflects a broader liability management approach, particularly in an environment where rollover risks and cash flow constraints have become more prominent.
However, extending maturities in a high-yield environment comes at a cost.
Borrowing costs remain elevated
The coupons attached to the February bonds highlight the continued high cost of domestic financing. While the seven-year bond carries a slightly lower coupon of 17.95 per cent compared to similar instruments earlier in the year, the 10-year papers are priced near the 19–20 per cent range.
In January 2026, a 10-year FGN JAN 2035 bond was offered at a steep 22.60 per cent coupon, reflecting the tight monetary environment at the time.
Although February’s 10-year bonds are priced below that peak level, they remain significantly higher than pre-tightening cycle averages.
Market participants attribute the sustained high yields to elevated benchmark interest rates, inflationary pressures, and investor demand for real returns. Institutional investors such as pension funds and asset managers continue to favour government securities due to their relative safety and attractive yields compared to other asset classes.
Yet, for the government, this means servicing domestic debt at rates close to 18–20 per cent—levels that place pressure on fiscal sustainability.
Fiscal pressures and funding needs
The decision to borrow N800bn in February reflects broader fiscal realities. With revenue mobilisation still constrained by oil production volatility and non-oil tax collection gaps, debt remains a central financing tool.
The 2026 budget framework anticipates significant domestic borrowing to bridge the deficit. While external loans and multilateral financing remain part of the strategy, domestic bonds provide quicker access to liquidity and avoid exchange rate exposure.
However, economists caution that sustained heavy domestic borrowing can crowd out private sector credit. When government securities offer high yields with minimal risk, banks and institutional investors may prefer lending to the sovereign rather than to businesses, potentially constraining economic expansion.
Market reaction and investor appetite
Despite concerns about rising debt stock, Nigeria’s bond market has demonstrated strong subscription levels in recent auctions. January’s N900bn offer attracted robust investor participation, reflecting confidence in the government’s repayment capacity and the attractiveness of yields.
Analysts expect similar demand dynamics for the February sale, particularly for the seven-year paper, which combines relatively high returns with moderate duration risk.
The re-opening structure also enhances liquidity in existing benchmark bonds, making them more tradable in the secondary market and strengthening overall market depth.
Debt sustainability debate
Nigeria’s public debt profile has been expanding steadily in recent years. While the debt-to-GDP ratio remains moderate by global standards, debt service-to-revenue ratios remain elevated, raising concerns about fiscal space.
High coupon obligations on domestic bonds contribute significantly to annual debt servicing costs. As yields approach 20 per cent on long-term securities, the compounding effect on interest payments becomes more pronounced.
Fiscal policy experts argue that borrowing at such rates must be accompanied by clear revenue-enhancing reforms and disciplined expenditure management. Without structural adjustments, rising debt servicing costs could crowd out critical capital investments.
Balancing cost and stability
From a policy standpoint, the government appears to be balancing two competing priorities: securing sufficient funding to meet expenditure commitments while attempting to moderate refinancing risks through longer tenors.
The slight decline in coupon rates compared to January may signal improving market sentiment or marginal easing in yield expectations. However, borrowing costs remain historically high, reflecting broader macroeconomic conditions.
If inflation moderates and monetary policy gradually loosens later in the year, yields could ease further. For now, the February bond auction underscores the fiscal authority’s continued dependence on domestic capital markets.
Outlook for 2026 borrowing costs
With N800bn scheduled for February alone, market watchers expect cumulative domestic borrowing for the first quarter to remain elevated.
The pace and structure of subsequent auctions will likely depend on revenue performance, oil receipts, and evolving macroeconomic indicators.
For investors, government bonds continue to offer attractive returns relative to alternative assets. For policymakers, however, the challenge lies in ensuring that rising domestic debt does not translate into unsustainable interest burdens in the years ahead.
As the DMO proceeds with the February auction, attention will focus not only on subscription levels but also on stop rates and investor composition—key indicators of confidence in Nigeria’s fiscal trajectory.
