October 25, 2021 / 11:12 AM / by FBNQuest Research / Header Image
The DMO held its monthly auction of FGN bonds last week Wednesday. It offered NGN150bn, raised NGN193bn (US465m), and attracted a total bid of NGN251bn. It offered its ten, 20, and 30-year benchmarks. The marginal (stop) rates for the ten and 20-year bonds were 11.65%, and 12.95% respectively, while that for the 30-year benchmark (Mar '50s) widened by 20bps to 13.20%. The two shorter benchmarks, the Jan '26 and Mar '37 were re-opening of different issues as per the DMO's Q4 '21 calendar. As such, no direct comparisons can be made with the preceding month's marginal rates. However, the trend is upward and reflective of a conventional yield curve across the three different tenors.
So far this year, the DMO has now raised NGN2.39trn at its bond auctions, including non-competitive sales to government entities. As such, even if the modest sums generated from the sale of other debt instruments are excluded, the agency is on track to meet its domestic borrowing target of NGN2.74tn (including the supplementary budget).
Looking ahead, we see from the finance minister's FY '22 budget presentation that the proposed budget implies a projected deficit of NGN6.3trn, of which NGN5.01trn is to be funded by domestic and external borrowings in a 50/50 split. Consequently, the DMO will have another onerous target for FY '22.
After a slight contraction of c.-90bps m/m in August, yields across the (secondary market) curve have now retraced by roughly over 30bps, matching the small upward trend in yields seen at the primary auction.
In our view, the size of the fiscal deficit and scale of issuance of FGN papers are the greatest drivers of market yields. Consequently, we expect that the FGN's huge financing requirement for next year, and by extension the potentially large supply of FGN paper, will exert upward pressure on market yields.
Sales and demand at FGN bond auctions (NGN bn)
Sources: Debt Management Office (DMO); FBNQuest Capital Research