An Auction for the DMO to Savour


Thursday, September 28, 2017 10:51AM / FBNQuest Research

The DMO can be satisfied with yesterday’s monthly auction of FGN bonds. It offered N135bn, raised N244bn (US$800m) and attracted a total bid of N395bn, the highest for at least four years. The bid for the five-year benchmark, which has created some marketing headaches of late at the DMO, was the best since February. Further, the stop rates for the three reopened issues on offer were between 81bps and 98bps lower than the previous month. All falls in issuance costs are welcome at the FGN, which is struggling under a domestic debt service mountain.

The DMO has now raised N1.26trn from sales of bonds at auction in just nine months and so reached the target of N1.25trn for domestic financing of the 2017 budget deficit. It can therefore approach the remaining auctions in 2017 from a position of relative strength.

Yet it may have to raise additional funds at auction because the deficit may overshoot in view of poor non-oil revenue collection and because there are uncertainties surrounding the attainment of the target of N1.07trn (US$3.5bn at the budget rate of N305) for external financing of the deficit.

The FGN bonds are no longer the only element in the financing target. The DMO can look to modest contributions from its retail savings bonds and last week’s maiden sukuk (Islamic bond) launch.

As well as this latest auction, the DMO can take satisfaction from the fact that the N100bn sukuk offer was modestly oversubscribed.

Institutional demand for FGN paper has been boosted by a change in the CBN strategy at OMOs and by the return of offshore investors. For the sake of context we note that bond yields are back where they were in Q4 2016.

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