September 2021 Bond Auction: A Good Auction Outcome for the DMO

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Friday, September 24, 2021 / 10:03 AM / by FBNQuest Research / Header Image Credit: iStock

                                                                                                                                                                                

The DMO held another successful auction of FGN bonds on Wednesday when it offered the same menu of debt instruments (ten, 20, and 30-year benchmarks) for the third month in succession. It offered the usual NGN150bn according to its calendar, raised NGN277bn (USD670m), and attracted a total bid of NGN334bn. The marginal (stop) rates for the two shorter tenor bonds were unchanged whereas that for the Mar '50s widened by 20bps to 13.00%. This was another commendable effort by the DMO. Having collected NGN1.66trn (gross) from FGN bond sales in 2020, it has been set a record domestic funding target of NGN2.34trn this year.


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The DMO has now collected NGN2.19trn in nine months from the sale of FGN bonds including non-competitive bids from public agencies. This leaves it well placed to hit the target even without the small sums it makes from the sale of other instruments. Our assumption is that the target is not being adjusted in light of the NGN980bn supplementary budget.

 

The predominance of FGN bonds in the fixed income space clearly helps the DMO. If we take market capitalization as quoted by FMDQ as our crude measure, we have figures of NGN12.63trn for these bonds, compared with NGN770bn for corporate bonds, NGN270bn for commercial paper and NGN180bn for state government issuance.

 

FGN bonds represented 60% of the assets under management of PFAs at end-July, compared with 8% for corporate bonds.

 

Given the success of the auctions, it is no surprise that the DMO comfortably meets the 75/25 target for the medium and long-term/short-term mix of the FGN's domestic debt. We learned from the investor presentation for the recent Eurobond issue that the mix as at end-June was 86/14.

 

We have heard the argument that the successful Eurobond issue will lead to a compression of FGN bond yields. This might be a very short-term trend although we feel that large FGN deficits (and an overshoot signaled for 2021) are the greater driver of the market.

 

Foreign portfolio investors (FPIs) again seem to have stayed away from the auction. They can be forgiven in view of the external payments pipeline. They also have a number of liquid debt markets internationally from which to choose.  (We have noticed that the FMDQ reports on inflows at the I&E window show a modest supply from the offshore community.)

 

Sales and demand at FGN bond auctions (NGN bn)                    

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


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