How to Buy, Sell Federal Government Bonds
Investors with low-risk profiles are the key buyers of fixed income securities. This is due to near-zero default risk but the market has been dotted by a low-interest rate environment in recent times.
Investment in fixed income instruments – Treasury Bills, FGN Bonds, Open Market Operation Bills, others – used to be a safe haven for Nigerian Banks to boost their bottom line. Lately, interest yielding assets have been underperforming.
The spot prices on new issuances are now exposed to headline inflation. This story actually started sometime around August/September 2019 when the apex bank banned non-banks and individuals from accessing open market operations.
When you hear that bondholders are earning a negative real return on investment, what it means is that their return is below the average inflation rate. Some call it financial repression – a situation where a government pays low interest on borrowings despite steep inflation rate conditions.
Experts however feel that since investors take no risk buying government instruments, there is no point paying a premium for such investment. What is premium? Premium is the amount paid to investors for taking extra risk.
Where do you buy Federal Government bonds? When a government issues bonds, it does so via a debt management agency – basically, the Debt Management Office. However, if for some reason, interested investors seek to buy but government instrument, it is readily available in the secondary market.
Primary Debt Market:
FGN Bonds Auctions exercise is carried out by the DMO on a monthly basis. Primary Dealer Market Makers (PDMMs) empanelled by the DMO are responsible for submitting bids for themselves and on behalf of their clients at the Auctions.
Secondary Debt Market:
Trading in FGN Bond is done on a daily basis in the secondary debt market by licensed broker-dealers (banks and stockbrokers) on the floor of The Nigeria Securities Exchange (NSE) and on FMDQ OTC Securities Exchange.
The PDMMs are obligated to provide a two-way quote for FGN Bonds. This means that you can buy or sell your FGN Bonds whenever the need arises.
Who are Primary Dealer Market Makers (PDMMs)? PDMMs are banks appointed by the DMO to act as authorized dealers in FGN bonds. Their major functions are to take up, market and distribute the Primary Issues of FGN Bonds.
Make markets in FGN Bonds on request, through the provision of continuous and effective two-way quotes to all PDMMs and non-PDMMs on demand and in all market conditions.
What are the requirements to buy FGN BONDS? According to DMO, here are what interested investors would need to know.
1. Application forms can be obtained from any of the authorized dealers (PDMMs), or downloaded from the DMO’s website New FGN Bond Tender Form
2. Complete the application forms and submit them through any of the PDMMs.
3. Common-price auction system is normally employed as opposed to multiple price auctions.
4. Payments for the allotment are payable in full on application.
5. Minimum of N50,001,000.00 and multiple of N1,000.00, thereafter.
6. Investors can also access the FGN bonds after the Auction in the secondary market through any of the broker-dealers on the FMDQ OTC Trading Platform or through Stanbic IBTC StockBrokers on The Nigerian Stock Exchange (NSE).
7. FGN bonds purchase is confirmed by electronic registration in the Central Bank of Nigeria’s Scriptless Securities Settlement System or by issue of certificates, where required.
8. Interest is paid semi-annually until the maturity date when the principal amount is repaid.
9. Payment of interest is through the issue of interest warrant (cheque) or direct transfer to current or savings bank accounts of the investor.
10. Bondholders who do not want to hold the bonds until maturity date can sell them at any time on the floors of the NSE or through, the FMDQ OTC Trading Platform.