Monday, December 19, 2016 9:38 AM /FBNQuest Research
The DMO sought to raise N95bn from last week’s monthly auction of FGN bonds yet registered sales of just N69bn (US$230m). The total bid of N103bn was an improvement on the previous month’s N62bn but otherwise the lowest since December 2014.
We are seeing clear signs of investor fatigue, the predominance of the PFAs in the profile of bidders and the impact on demand of holding the auction before the latest release of FAAC monies into the banking system. The marginal rates (effective cut-off points) were up to 50bps higher than one month earlier. Macro considerations are finally visible in the auction results.
The auction was not an unmitigated disaster because the DMO had already met its funding target for the year from the federal finance ministry. Over the full year it has raised N1.12trn (gross). The DMO therefore chose to reject more than 30% of the total bid in an effort to contain financing costs.
We learnt from the president’s 2017 budget speech to the National Assembly that the FGN deficit is projected at N2.36trn and the domestic borrowing component at N1.25trn. We cannot say what changes the assembly will seek and when the budget will be signed off. In any event, another challenging year lies ahead for the DMO.
The monetary policy committee’s view is that the principal drivers of inflation are supply-side and beyond its influence. We think that it will start to cut its policy rate next year as headline inflation slows on positive base effects with effect from February.
At last week’s auction, it raised just N3bn from sales of the benchmark five-year paper, compared with its offer of N35bn. The DMO partly compensated by collecting N41bn from the reopening of the long bond (Mar ’36) and so above its offer (of N35bn).
This reinforces the point that the PFAs predominate. They favour the long-term instruments so as to match their liabilities. Other domestic investors can reasonably argue that the longer tenor NTBs pay rather better returns.