Rates Spike as DMO Struggles to Sell FGN Bonds to Investors
Marginal rates spike across tenored as the Debt Management Office (DMO) struggles to sell Federal Government of Nigeria (FGN) re-opening bonds to investors at the primary market auction conducted earlier this week.
Demand fell through, according to auction results as analysts noted that investors shy away from staking large investments at the auction amidst rising uncertainties in the macroeconomic environment.
MarketForces Africa reported that DMO conducted a primary market auction for FGN bonds with N225 billion offered made to investors. Unfortunately, there was apathy towards government instruments in the market as investors face rising inflation rates and weak naira.
Demand was under pressure, causing Nigeria’s debt office to raise the amount below the total offered as market participants seek a better return on investment. Analysts told MarketForces Africa that the end to financial repression started in May with a 150 basis point interest rate hike.
Again, in July, the apex bank booked the second hike in money pricing, up 100 basis points following the monetary policy committee’s unanimous decision to combat rising inflation rate in the country.
At the bond auction this week, DMO was able to raise N200.9 billion, a sum below a total offer of N225 billion, through re-openings of 2025, 2032 and 2042 FGN bonds. The participation level was higher when compared to the auction held in July, according to analysts.
However, total subscriptions remained lower when compared with the average for the first six months of 2022. The DMO secured a total bid of N247.1 billion at the bond auction, according to detail from the auction results posted on the DMO website on Tuesday.
Bids for 2025 FGN Bond were allotted at a marginal rate of 12.5%, according to the auction result, rising by 1.50% from 11% in July auction. Also, the 2032 FGN Bond was priced at 13.5% on Monday, from 13% in the previous auction.
Then, 2042 FGN Bonds settled at a marginal rate of 14%, up from 13.70% at the previous auction held in July as a result of investors’ apathy on long-dated government instruments. READ: Average Rate on Nigerian Treasury Bills Spikes 30 Basis Points
Market traders said the relatively low demand at the auction mirrors tight system liquidity. The financial system has been under pressure, forcing short-term rates to double-digit high in the money market.
This has impacted demand across Treasury, Open market operations (OMO Bills) as well as Bond auctions, forcing spot rates upward. “We note that market liquidity stood at a deficit of -N3.6 billion on Friday”, Coronation Research said in a market note.
The average interbank rate climbed by 50 basis points to close at 14.75%. This followed an increase in Open Buy Back rate and Overnight rate as both climbed by 50bps to close at 14.50% & 15.00%, respectively on Tuesday, according to data from FMDQ Exchange.
Analysts said the tightness in system liquidity can be partly attributed to CBN’s continuous use of the discretionary cash reserve ratio (CRR) debits. “We suspect that the negative real interest rates given the elevated inflation figure have contributed to investors’ apathy towards FGN bond yields”, according to Chinwe Egwim, Chief Economist at Coronation Research
In the secondary market for FGN Bonds, the average yield rises three basis points to 12.72% on Tuesday, according to Alpha Morgan Capital note. “The CBN’s in-house estimates suggest that inflation is likely to remain considerably high, partly due to the build-up of increased spending related to the 2023 general elections.
“The monetary policy committee (MPC) believes that further tightening would help moderate worsening inflationary trend and narrow the real interest rate gap”.
“… given the upward trend in inflation, expectations of another rate hike is not far-fetched”, Egwim said in the market note. The DMO had set out to raise a maximum of N1.9 trillion in the third quarter of the fiscal year 2022. However, year-to-date, it has raised N2.1 trillion, according to Coronation Research exceeding its target by 12% or N220 billion.
Analysts believe that given that the DMO is expected to offer instruments worth N221 – 240 billion through the reopening of the 13.53% FGN MAR 2025, 12.50% FGN APR 2032 and 13.00% FGN JAN 2042 bonds in September, the agency is likely to exceed its Q3 borrowing target.
“Allowing for the smaller amounts which the FGN raises from the sale of other debt instruments such as Treasury bills and savings bonds, DMO is on track pro rata to meet or exceed the domestic borrowing target for the year set at N3.53 trillion”, Coronation Research stated.
On the expectation that the Nigerian government will increase borrowing via FGN bonds, analysts said they see an uptick in yields across the curve. “We see mid-curve FGN bond yields around 12.0 – 13.5% and yields at the longer end of the curve between 13.25% – 14.25% over the next one month”, Coronation Research projected. # Rates Spike as DMO Struggles to Sell FGN Bonds to Investors