Some Room for Manoeuvre for the DMO

Friday, June 19, 2020 / 09:28 AM / By FBNQuest Research / Header Image Credit: Irish Times

The DMO can draw several positives from this week's FGN bond auction, when it offered the same menu for the fourth month in succession. It offered N150bn, raised N100bn (US$260m) and attracted a total bid of N545bn. Marginal rates were 45bps-120bps lower than in May, so the DMO was able to bring down the FGN's borrowing costs. The total bid was the highest for at least six years (other than January this year), and the DMO was able to maintain a conventional yield curve. Its funding target for 2020 stands at 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 N1.31trn from bond sales in six months this year. However, we should set a repayment on maturity of about N600bn in February against these gross auction proceeds.

The DMO can supplement these proceeds with its sales of green bonds, sukuk and savings bonds. Sales of its third sovereign sukuk earlier this month reached N163bn, and the initial offer was more than four times oversubscribed.

It seems that sukuk refunds formed a good part of the total bid this week. More generally, the FGN bonds are popular with PFAs, fund managers and high net worth individuals, all investor categories with cash to deploy regularly. They have very few investment alternatives with comparable returns.

Assuming the DMO achieves reasonable sales of other debt products, we estimate that it will need to raise about N100bn per month at the remaining auctions this year to attain its enhanced funding target. It has manoeuvred itself into a good position, such that it can be a bit more selective in its acceptance of bids at auction. 

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