FGN Bond Auction: We expect investors’ patronage to be positive – Meristem
Ahead of the Federal Government Bond auction on Wednesday, Meristem, a capital market conglomerate, has stated that it expects investors’ patronage to be encouraging, though recognises that investors could be demanding for high rates.
The FGN, through the Debt Management Office, will be conducting a bond auction on Wednesday 20th of May 2020.
In a note, the firm explained that market participants are relying heavy on cash and liquidity in these times, and this continues to pressure yields further.
“Investors could be demanding for high rates to compensate for increasing local economic vulnerabilities amid the lingering impact of COVID-19”, the firm noted.
Research analysts at Meristem stated in a note that the total amount on offer is expected to fall within the range of ₦30 billion to ₦60 billion.
According to the firm, all three instruments on offer are re-opening issues.
Investors at the last FGN bonds primary market auction sustained the bullish momentum from the March auction, the firm stated.
It explained that this was evinced by the bid-to-cover ratios of 1.65x, 1.49x and 2.21x on the 12.75% APR 2023, 12.50% MAR 2035 and 12.98% MAR 2050 instruments respectively.
Meristem held that this was occasioned by over-allotments as the three maturities were issued beyond the anticipated offer range of ₦10 billion — ₦20 billion.
The bearish sentiment which has reigned in the bond market since the spread of the global pandemic has remained strong.
Since the last primary market auction (PMA), the average bond yield has risen from 9.98% to 10.55% as at 15th of May 2020.
Meristem attributes this to the continued selloffs in the market, coupled with a relative liquidity squeeze.
Thus, following the debit of commercial bank balances by about ₦1.4 trillion and the recent OMO auction which gulped ₦100 billion.
In addition, market participants are relying heavy on cash and liquidity in these times, pressuring yields further.
On the domestic front, economic activity is slowly gaining traction following the relaxation of the lockdown rules.
“We believe that this move will slightly improve the earning prospects of government”, Meristem stated.
Similarly, the firm stated that the global economies are slowly reopening and the oil supply deal from April has triggered a 60% rise in crude oil price.
This bodes well for Nigeria as proceeds from crude oil remains a crucial source of revenue for the economy.
The Nigerian government is increasingly making efforts to meet its fiscal responsibilities without pressuring future earnings viz-a-viz debt servicing costs.
This is evident by switch in borrowing plans from a mix of both domestic and external funding sources to solely domestic sources, as it avails a cheaper debt.
In addition, the government has further revised budget oil benchmark downward to USD25/barrel.
A development which moderated the budget deficit to ₦5.37 trillion.
“We expect investors patronage at the auction to be encouraging, even as they demand for high rates to compensate for increasing local economic vulnerabilities amid the lingering impact of COVID-19”, Meristem stated.
FGN Bond Auction: We expect investors’ patronage to be positive – Meristem
