Friday, May 13, 2016 9:05AM/FBNQuest Research
The DMO’s monthly auction of FGN bonds on Wednesday proved challenging. It sought to raise N105bn, attracted a total bid of N160bn and collected N53bn. Its bond sales were the lowest of the year as the DMO balked at the range of bids and set its marginal rates (effective cut-off points) accordingly.
Nonetheless, the rates increased by between 82bps and 125bps from the sale of the same debt instruments the previous month. Rising inflation and monetary tightening are together pushing up yields.
This trend is set to continue. We see inflation at 13.7% y/y in April, and we expect another rate hike when the MPC meets the week after next.
The size of that hike should be influenced by the CBN’s staff projections for inflation. There would be little merit in a hike to, say, 14.00% if the projections guided to inflation of 15.00% y/y the following month.
The DMO may not balk at the bids at the next auction, given the scale of the funding requirement. Net domestic debt issuance is set this year at about N950bn, and holders of the Aug ‘16s have to be paid a further N560bn on maturity. Ytd the DMO has raised N418bn.
That domestic issuance could be trimmed if the FGN secures higher-than-projected external funding on concessional terms (and if it does not exceed its deficit target). We now understand that the mooted US$6bn loans from China would not be budget support, which adds to the importance of the FGN’s talks with the World Bank, the AfDB and others.