Nigerian President Bola Tinubu‘s reforms are sparking the biggest bond rally in emerging markets as the West African nation’s two-digit carry yields are backed by increasing government revenue, slowing inflation and a stable currency.

Naira-denominated bonds of Africa’s largest crude producer have extended their 2025 rally with an 8.6% total return in July, the best performance among the 23 countries in the Bloomberg EM Local Currency Government Universal Index both for the month and the year.

Since coming to power in May 2023, Tinubu has eliminated fuel subsidies weighing on the government’s budget. He followed it up with a tax overhaul, while the central bank has allowed the naira to trade more freely. The measures have helped to reduce the fiscal deficit, boost reserves and keep the current account in surplus. And investors are just beginning to back the reforms, after staying on the sidelines for most of 2024.

“The optics have been constructive this year for Nigeria,” said Matthew Reed, head of trading at the Bank of Africa UK Plc in London. “The currency has stabilised after a volatile 2024 and this removes a notable hurdle for many international accounts looking to invest in the local bond market.”

The latest gains are a turnaround for Nigeria’s local-currency bonds, which posted the biggest losses among emerging and frontier markets last year as global money managers still doubted if Tinubu’s reforms will continue. But with inflation falling from a 28-year high and currency volatility ebbing, confidence in his program has grown.

Naira’s 30-day historical volatility has fallen from 23% in December to 4.6% now, according to data compiled by Bloomberg. Inflation has cooled for a third straight month in June to 22.2%, while the central bank has held the benchmark rate at 27.5%.

Government revenues increased 43% in the first half compared to the prior period, and recent tax changes are seen boosting revenue collections further. A rebasing that increased Nigeria’s gross domestic product by 30% has improved debt ratios and opened the room for better ratings and fresh borrowing.

The lower inflation, expectation of rate cuts and a more stable naira have made Nigeria a more attractive investment case, said Joseph Cuthbertson, a sovereign analyst at PineBridge Investments in London. Nigeria is on a “positive macroeconomic trajectory following its reform efforts,” leaving local debt attractive, he said.

The July rally in naira bonds extends year-to-date gains to 26%, compared with an emerging-market average of 7.1%. That partially recoups a 40% loss suffered by investors last year.

A credit upgrade this year by Moody’s has also helped, said Patience Oniha, the head of Nigeria’s debt management office. The ratings company raised Nigeria from Caa1 to B3 citing “significant improvements in the country’s external balance and fiscal position.” That placed it on the cusp of “re-entering the broader pool of emerging markets considered investable by institutional debt investors,” Moody’s said.

Despite recent gains, Nigeria’s local bonds are “still attractive,” said Aurelie Martin, a fixed-income analyst at Ninety One. The naira has found some stability “reaping the benefits of the tough monetary and fiscal reforms of the past couple of years,” while slowing inflation will enable the central bank to cut rates supporting naira notes further.