Market News

ANALYSTS say naira-denominated investments remain attractive in the near term, not because investors have suddenly developed strong confidence in the local currency, but because Nigeria’s high interest rates are offering one of the most profitable yield opportunities in emerging markets.

In a recent note, analysts described the current shift into naira assets as a “carry trade” driven by yield compensation, not a sign of renewed trust in long-term exchange rate stability.

“Investors are not abandoning the dollar because they suddenly trust the naira. They are responding rationally to yields, access constraints, and policy signals,” the analysts said.

The shift is happening at a time when naira fixed-income instruments are delivering returns above 20 percent, while the Central Bank of Nigeria (CBN) maintains a tight policy stance with the Monetary Policy Rate (MPR) at 27.5 percent.

Analysts said the combination of high nominal yields and easing foreign exchange volatility has made naira instruments attractive for both local and offshore investors seeking short-term returns.

The development is also supported by a major narrowing in the foreign exchange premium. In 2023 and 2024, speculative demand for dollars pushed the gap between the official and parallel market exchange rates above N300 per dollar, representing about 65 percent. By February 5, 2026, that gap had fallen to less than N74 per dollar, roughly 5 percent.

However, experts caution against interpreting the trend as a full return of confidence.

Recent data from a KPMG-linked report showed naira-denominated mutual funds surged by 140 percent year-on-year, while dollar-denominated funds grew by just 12 percent. While this could suggest stronger appetite for naira investments, analysts argue the reality is more complicated.

“What the market is witnessing is not a ‘confidence’ trade but a ‘carry’ trade,” analysts said, noting that investors are simply taking advantage of the wide interest rate differential.

Financial analyst Kalu Aja also cautioned that many observers are misunderstanding the trend.

“Folks are reading this but not understanding what they are reading. Why will investors seek to hold Naira fixed income over US Dollars? Think about it slowly,” he said.

Analysts explained that investors are willing to take naira exposure because they are being compensated for risk through unusually high yields, especially in Treasury Bills and other short-term instruments.

But concerns remain around the credibility of Nigeria’s exchange rate regime, particularly after recent divergence between official pricing benchmarks.

On February 4, 2026, three different exchange rates were in operation: the CBN NFEM rate of N1,358.28 per dollar, the Customs exchange rate of N1,451.63 per dollar, and the parallel market rate of about N1,440 per dollar.

Proshare Research analysts said the Customs rate, sitting above both official and street levels, raises fresh questions about policy coordination and the sustainability of exchange rate stability.

“When a government revenue agency prices FX higher than both the official and parallel markets, it quietly undermines the credibility of the narrative the market is being asked to believe,” the note said.

Prishare Economic Intelligence Unit said the implication for investors is clear: naira assets offer strong short-term yield opportunities, but dollar assets remain essential for long-term protection.

“Naira assets remain attractive for yield harvesting in the near term,” the analysts said, adding that investors should manage duration carefully and maintain exit options.

They concluded that Nigeria’s FX market is improving, but the current shift reflects “transition, not transformation,” as capital responds more to incentives than confidence.