July 24, 2020 / 09:55 AM / By FBNQuest Research / Header
Image Credit: Debt Management Office
The DMO should be pleased with the outcome of this week's FGN bond auction, when it launched a new 25-year benchmark alongside three re-openings. It offered N130bn across the four instruments, raised N177bn (US$460m) and attracted a total bid of N470bn. Comparable marginal rates were 150bps (Mar '35s) and 220bps (Mar '50s) lower than in June, so the DMO has again reduced the FGN's borrowing costs with a successful auction. Its funding target for 2020 was more than doubled to 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 N1.49trn from bond sales in seven months this year. However, we should set a repayment on maturity of about N600bn in February against these gross proceeds.
The federal finance ministry and budget office do not share their interest rate assumptions but we are confident, given the direction of rates on NTBs (Nigerian T-bills) and the FGN bonds, that they will see welcome savings on the N1.87trn projection for domestic debt service in the revised 2020 budget. The outturn in 2019 was N1.66trn.
Market liquidity was enhanced by an inflow from FAAC on Monday. We also understand that some investors revised their bids once they sensed the scale of demand at the auction. This begs the question 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. Our hunch is that that point is not far off, 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 seven months' performance, we feel that the DMO is well placed to meet its target for the year and build an additional cushion for itself.