April 23, 2021 /04:19 PM / By FBNQuest Research / Header
Image Credit: DMO
The DMO held its monthly auction of FGN bonds on Wednesday. It offered its usual NGN150bn, raised NGN158bn (USD390m) and secured a total bid of NGN266bn. The marginal rates on the ten, 15 and 25-year benchmarks rose by 175bps, 184bps and 185bps from the previous month respectively. The DMO could, of course, have accepted fewer bids and set lower marginal rates. However, it has been set a challenging domestic funding target of NGN2.34trn towards the projected deficit of NGN5.60trn in the FGN's 2021 budget, subject to revision. (Its external target is identical). By way of reference, we recall that the DMO collected NGN1.66trn (gross) from FGN bond sales in 2020.
In four months the DMO has now raised NGN910bn at its bond auctions including non-competitive sales to public agencies. When we allow for the smaller amounts it generates from the sale of other debt instruments such as sukuk, it is evidently on track pro-rata to meet the target for the year.
The PFAs were again the leading participant in the auction, and will welcome the retracement in yields from the low point in November and December. We feel that it has a little further to run. The DMO's funding target is probably the main driver of the trend.
Also, investors have alternatives in the naira-denominated fixed-income space. Corporate bond sales have picked up, and the continuing securitization of the previous administration's domestic arrears could bring tradable issuance of another NGN1.5trn.
Some foreign portfolio investors (FPIs), particularly those not in the payments pipeline, may be tempted back into the market by a little more retracement. Reputational risk can be overstated in our view when investors identify what they see as a compelling investment. Our hunch, however, is that the domestic institutions will again make the running, and that the FPIs will generally stick with less complicated trades with comparable (or better) returns elsewhere.
The Jul '45s attracted about two-thirds of the total bid. They trade at a steep discount. We should also mention that they are not being offered in May's auction although the DMO's provisional issuance calendar shows that they return to the menu for June. The 30-year benchmark (Apr '49s) takes the place of the Jul '45s in the auction in May.
Sales and demand at FGN bond auctions (NGN bn)
Sources: Debt Management Office (DMO); FBNQuest Capital Research