The DMO held its latest monthly auction of FGN bonds on Wednesday. It offered NGN150bn, raised NGN122bn (USD310m) and attracted a total bid of NGN238bn. The marginal rates on the reopened 15 and 25 year benchmarks rose for the second month, by 180bps and 195bps respectively. (The DMO also reopened the ten-year benchmark, which it had not sold for over one year.) By accepting fewer bids, the DMO would have set lower marginal rates.
However, the FGN has a large borrowing programme ahead of it this year, not least because of the additional hit to revenue collection as a result of the Covid-19 virus. In the secondary market, FGN bond yields have been rising since the start of the year. This was the background to the first auction of 2021, along with the sense that the DMO would front-load its issuance.
When we add sales on a non-competitive basis to public bodies, the DMO raised NGN170bn from the auction this week.
Local media sources have reported that the approved 2021 budget provides for issuance totalling NGN4.68trn by the DMO, and that the domestic/external split is set at 50/50. When we recall that it raised NGN1.66trn (gross) last year from sales of FGN bonds (Good Morning Nigeria, 19 January 2021), we can see that the reported domestic funding target for this year is highly challenging. The DMO collects smaller sums from the issuance of other debt instruments such as NGN163bn from a sale of sukuk in H1 2020 but its attainment of its target hinges upon the FGN bond auctions.
These supply factors would normally suggest that the widening of yields has further to run. There are also indications that the CBN is increasing the size of its auctions of OMO bills. In the past foreign portfolio investors would have taken up some of the slack but the pipeline of delayed external payments, not forgetting the more attractive rewards in Egypt and elsewhere, makes their return in numbers unlikely.
The PFAs are the pivotal investors, holding 63% of the entire stock of FGN bonds. They have grown their exposure to domestic equities but there are limited alternative investment outlets with which they are comfortable.
We understand that the PFAs were less prominent in the total bid this month, being reluctant to commit their funds when the trend in yields is again rising. We also hear that speculative accounts were more visible than usual.
Sales and demand at FGN bond auctions (NGN bn)
Source: Debt Management Office (DMO), FBNQuest Capital Research