24, 2020 / 12:25 PM /by FBNQuest Research / Header Image
Credit: Kofkin Bond
The DMO should be reasonably happy with the result of last week's FGN bond auction, which, while not spectacular as those held in January and May, leaves it in the driving seat. It offered N150bn across the four re-issues including a 25-year benchmark first launched in July, raised N117bn (US$300m) and attracted a total bid of N242bn. The marginal rate for the Jan '26 was 70bps higher than the previous month, and 5bps-15bps lower for the three other bonds. The DMO's funding target for 2020 stands at N1.60trn, which is to be fully raised in the domestic market.
When we add receipts from non-competitive bids from public agencies, the DMO has raised N1.62trn from bond sales in eight months this year. However, we should adjust this gross figure for a repayment on maturity of about N600bn in February.
The federal finance ministry and budget office do not share their interest rate assumptions but it would appear, given the direction of rates on NTBs (Nigerian T-bills) and the FGN bonds, that they will see some savings on the N2.66trn projection for total debt service in the revised 2020 budget. The outturn in 2019 was N2.11trn.
The topical question is how far the compression of yields will continue. There is surely a point at which the PFAs and other cash-rich investors start to look elsewhere, which trend has been evident with NTBs in recent months. Our hunch is that that point is approaching, and that we will then see some modest retracement.
Sales and demand at FGN bond auctions (N bn)
Sources: Debt Management Office (DMO); FBNQuest Capital Research
On eight months' performance, we feel that the DMO is well placed to meet its target for the year and build an additional cushion. It also raises funds from the sale of other instruments such as the sukuk and green bonds.