Monday, February 22, 2021 / 12:03PM / by
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The DMO held its latest monthly auction of FGN bonds on Wednesday. It offered NGN150bn, raised NGN81bn (USD200m) and attracted a total bid of NGN190bn. The marginal rates on the reopened ten-, 15- and 25-year benchmarks rose sharply, by 227bps, 251bps and 285bps respectively. As ever, the DMO had the choice of accepting fewer bids and thereby setting lower marginal rates. However, the FGN has a very large borrowing programme ahead of it, magnified by the hit to non-oil revenue collection as a result of the COVID-19 virus. This was the background to the second auction of 2021.
When we add sales on a non-competitive basis to public bodies, the DMO raised NGN203bn from the auction this week. The figure for total sales for the first two months is NGN373bn.
Pro rata on an annual basis, this would get the DMO to its reported funding target for the year. We understand from local media sources that the approved 2021 budget projects issuance totalling NGN4.68trn by the DMO, and that the domestic/external split is set at 50/50. Given that the DMO raised NGN1.66trn (gross) last year from sales of FGN bonds in 2020 and allowing for its issuance of other debt instruments such as sukuk to collect smaller sums, it is clear that the reported target for 2021 is highly challenging.
We note in passing that the DMO has released its new medium-term debt strategy since the approval of the budget. The objective for the domestic/external split in the debt portfolio of the FGN and state governments combined has been adjusted from 60/40 to 70/30. This would normally have supply implications for the FGN bond market.
We should also note the continuing programme to issue pro-notes to clear the arrears of the previous administration. Additional issuance could reach NGN1.5trn. Finally there are the plans to convert an estimated NGN10.0trn in the FGN's Ways and Means advances from the CBN into 30-year bonds. The new instruments would be issued to the CBN, which would surely be reluctant to sell them into the market and thus boost further the stock of tradeable FGN debt.
According to the textbook, these supply considerations create upward pressure on rates. It is conceivable that new foreign portfolio investors and those in the pipeline waiting to exit are tempted back into the market by higher returns. That said, our hunch is that the PFAs and other domestic institutions will make the running, and will remain the pivotal investors in the FGN bond market provided that returns meet their expectations.
Sales and demand at FGN bond auctions (NGN bn)
Source: Debt Management Office (DMO), FBNQuest Capital Research