February 27, 2020 / 10:25 AM / By FBNQuest Research / Header Image Credit: Annuity1
While a less striking outcome than the previous month, the auction of FGN bonds by the DMO last week was still a notable success. It offered N140bn, raised N100bn (US$270m) on a competitive basis and attracted a total bid of N398bn.
Further, marginal rates declined for all three instruments, and by 110bps for the five-year benchmark. The DMO collected N410bn (gross) from bond sales in January and positioned itself for a maturity of about N600bn earlier this month. It has a net domestic borrowing target of N745bn per the approved 2020 budget.
When we add sales proceeds from non-competitive bids, which we assume to originate from public agencies, the DMO has raised N572bn from bond sales in just two months. It is set to supplement these proceeds with sales of sukuk, green bonds and savings instruments.
Sales and the bid were again the highest for the 30-year paper, which points to robust demand from the PFAs for matching purposes. Along with other domestic non-bank investors, they are no longer eligible to take part in the CBN's open market operations (OMO). Therefore they require new investment outlets when their OMO bills mature. This brought about a sharp fall in the yields for NTBs in Q4, and the same trend is now evident for the bonds.
This is borne out by monthly data from Pencom. PFAs' holdings of the bonds increased by N490bn in December while those of NTBs declined by N240bn. We would expect this trend to continue into this quarter.
Sales and demand at FGN bond auctions (N bn)
Sources: Debt Management Office (DMO); FBNQuest Capital Research
The interest rate assumptions in the 2020 budget are not public knowledge. Nonetheless, the long period of budget preparation and the sharp compression of yields, notably for NTBs, tell us that the projection of N2.45trn for total debt service this year (excluding the sinking fund for contractor promissory notes) is conservative.