Rates Spike as PFAs, Banks Reduce Appetite in FGN Bonds

At the Debt Management Office (DMO) primary market auction for Federal Government of Nigeria (FGN) bonds, pension fund administrators (PFAs), local deposit money banks and other authorised market participants exhibit weak investing sentiments across tenors.

At the auction, demand came lower, hitting Oct 2022 low and there were selloffs in the secondary market amidst growing uncertainties in the local economy. Pressure from a sustained rise in headline inflation has reduced investors’ propensity to build naira asset portfolios as real return continues to shrink.

Partly, negative interest yield on investment has kept foreign investors with bags of hot money away from the fixed income market. To attract foreign investors into a selective market where rates appear solid, the apex bank resumed OMO bills auction in the second half, while fixed interest securities await catalysts to drive yield repricing.

Even with repressive rates on borrowings, the bond market has been supported by robust liquidity in the financial system. But funding pressures have already built up, forcing banks to pitch tents at the Central Bank of Nigeria’s standing lending facility.

Last week, the overnight rate expanded by 567 basis points to 24.4%, as the settlements for the FGN bond auction worth N316.49 billion outstripped inflows from FGN bond coupon payments valued at N51.12 billion and N10 billion inflow from OMO maturities, Cordros Capital said in a market update.

Consequently, the average system liquidity closed lower at a net short position of N273.74 billion as against a net long position of N164.66 billion in the previous week. “We envisage overnight lending rate will remain elevated in the new week, as we believe expected inflows from FGN bond coupon payments totalled N134.70 billion may not be sufficient to saturate system liquidity”, analysts projected.

Traders said the benchmark yield on Federal Government of Nigeria (FGN) bonds rose 23 basis points over investors’ apathy at the Debt Management Office auction last week.  At its monthly auction, the DMO allotted N316.49 billion, inclusive of non-competitive allotments of N65 billion, worth of bonds.

According to auction results, demand or subscription level was lower across the four instruments as the total subscription level settled at N290.99 billion, representing a slowdown in interest when compared with N312.56 billion staked in the previous auction.

The allotment was split across 10-year, 14.55% FGN APR 2029 worth N43.65 billion. Also, DMO allotted N75.45 billion worth of 10-year, 14.70% FGN JUN 2033 bond.

In addition, the agency offered 15-year, 15.45% FGN JUN 2038 worth N25.69 billion, and the 30-year, 15.70% FGN APR 2053 worth N171.71 billion.  At the best, there was a surge in spot rates across tenors.

According to Cowry Asset report, marginal rates on 10-year bonds increased by 65 basis points to 14.50%.  Analysts reported that 15-year bonds were priced higher by 45 basis points to 15.45% while 20-year bonds attracted a spot rate of 15.55%, 35 basis points above the previous auction sale.

The spot rate for the 30-year bond settled at 16.25%, 40 basis points above the 15.85% offered at the previous auction as investors demanded a higher rate. Nigeria Eurobond Slumps after CBN Resumes OMO Auction

DMO’s total subscription at the auction was the lowest since October 2022, according to Cowry Asset while the auction’s bid-to-cover ratio, a gauge of demand, fell to 0.92x from 1.36x.   Trading activities in the FGN bonds secondary market were bearish as the average yield expanded by 23 basis points to 14.4%. 

Across the benchmark curve, Cordros Capital reported that the average yield advanced across the short (+38bps), mid (+11bps), and long (+22bps) segments. The surge was attributed to profit-taking activities on the MAR-2025 (+152bps), APR-2029 (+24bps), and MAR-2050 (+47bps) bonds, respectively.

“We expect yields in the FGN bond secondary market to remain elevated, driven by the sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep borrowing costs moderate remain a downside factor”, Cordros Capital said in its market note to investors.

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