A Clear Winner from Crashed Bond Yields


Friday, October 23, 2020 / 1:31 PM / by FBNQuest Research/ Header Image Credit: Life Annuity LLC


At the monthly FGN bond auction on Wednesday, the DMO offered N30bn across two re-issues, raised N45bn (US$120m) and attracted a total bid of N236bn. The marginal rates crashed by 355bps and 290bps for the 15 and 25-year benchmarks respectively from the previous auction. The rates of 4.97% and 6.00% are now far out of sync with both domestic inflation (of 13.71% y/y) and the CBN's monetary policy rate (of 11.50%). They are also well below the prevailing rates for Eurobonds of similar tenor. The winner is the borrower (the FGN).


When we add receipts from non-competitive bids from public agencies, the DMO has raised N1.78trn from bond sales in ten months. Its funding target for the year is N1.60trn, which is to be raised solely from domestic debt instruments. However, we should allow for a repayment on maturity of about N600bn in February and note that the approved 2020 budget provides for a N273bn sinking fund.


The federal finance ministry and budget office do not share their interest rate assumptions but, given the direction of rates on NTBs and the FGN bonds, they will surely see decent savings on the N2.68trn projection for total debt service in the 2020 budget. The outturn in 2019 was N2.11trn.


The topical question is how far this crashing of yields will run. The PFAs are the main holders of the bonds and were reportedly the main bidders this week. In the past they had few, if any investment alternatives with comparable returns. This is no longer the case due to this narrowing of rates.


Sales and demand at FGN bond auctions (N bn)


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Sources: Debt Management Office (DMO); FBNQuest Capital Research



On ten months' performance, we feel that the DMO has positioned itself well to meet its funding target for the year. It also raises funds from the sale of other debt instruments such as the sukuk and green bonds.

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