Yields Mixed after DMO Sells Bonds at Higher Rates
Patience Oniha, DMO Chief

Yields Mixed after DMO Sells Bonds at Higher Rates

In the secondary market for trading government instruments, yields were mixed on Wednesday after the Debt Management Office (DMO) bond sold bonds at higher rates at the primary market auction conducted on Monday.

The auction result shows that the subscription level was tepid compared with the total subscription received last month, though the debt agency beats its own offering in an extremely competitive bid amidst a seesaw liquidity position.

On Wednesday, the liquidity level worsened as short-term interest rates in the money market jumped higher.  Data from FMDQ Exchange shows that the overnight lending rate expanded by 192 basis points to 13.2%.

Market analysts indicate the development in the money market occurred following the settlement of the September FGN bond auction worth N229.20 billion. When the DMO held its monthly auction of FGN bonds on Monday, it offered N225 billion but raised N229.2 billion through re-openings of 2025, 2032 and 2037 FGN bonds.

The bid-to-cover ratio – the naira amount of bids received at the auction against the amount sold – for September stood printed at 1.1x compared to 1.2x in August, according to analysts’ market report.

In total, Nigeria’s debt office secured a total bid of N246.4 billion at the auction, auction result shows that marginal rates inched upward amidst yield repricing in the fixed income market.

The bids for the 2025 FGN Bond, 2032 FGN bond and 2037 FGN Bonds benchmarks were allotted at the marginal rates of 13.5%, up from 12.5%, and 13.8% from 13.5% while the 15-year bond was priced at 14.5%.

The demand at this auction was partly driven by expected inflows of N166 billion in coupon payments later this month as well as, improved system liquidity is primarily driven by inflows of N185.8 billion in FGN bond coupon payments in the first three weeks of September, according to Coronation Research.

Meanwhile, the Nigerian Treasury bills secondary market traded bullish with pockets of buying interest that pushed the average yield downward by 2 basis points to 7.6%. Across the curve, Cordros Capital hints in its market noted that the average yield contracted at the short (-4bps) end as participants demanded the 36-day to maturity (-20bps) bills

However, the yield curve was flattish at the mid and long segments. Similarly, the average yield contracted by 111 basis points to 9.4% in the OMO bills segment, Cordros Capital stated.

In the secondary market for FGN bonds, there were sell pressures from a bearish stance of the market participants after marginal rates were adjusted upward earlier on Monday. Consequently, the average bond yield expanded by 20 basis points to 12.8%.

Across the benchmark curve, Cordros Capital wrote that the average yield expanded at the short (+41bps) and long (+10bps) ends due to selloffs of the MAR-2024 (153bps) and APR-2037 (+72bps) bonds, respectively. Conversely, the average yield was unchanged at the mid-segment.

DMO is unlikely to make a Eurobond call due to unfavourable market conditions in the international capital market, thus fixed income analysts expect the agency to ramp up local borrowing to meet the fiscal deficit target.

According to Coronation Research, the DMO had set out to raise N1.8 trillion through FGN bonds by the end of the third quarter of the fiscal year 2022.  However, DMO has raised N2.3 trillion from the beginning of the year to date, exceeding its target by 15% or N268 billion.

“Considering the sale of other debt instruments such as NTBs and savings bonds, the DMO is on track pro rata to meet or exceed its domestic borrowing target (N3.53trn) for the year”, Chinwe Egwim, Chief Economist at Coronation Research said in a note. 

Citing DMO’s latest public debt report, Coronation economist said total domestic debt increased by 5% quarter on quarter and 20.6% year on year to N26.2 trillion at the end of the second quarter of the year.  READ: Yield Rises to 10.44% as DMO Sells Bond

The increase can be partly attributed to increases in FGN bonds which rose 6.7% quarter on quarter in addition to a 2.2% surge in Nigerian Treasury bills NTBs and a 15.2% jump in FGN Savings bond sales.  FGN bonds accounted for 72.5% of total domestic borrowings in Q2.

“We maintain our view that the FGN is likely to depend on domestic borrowing to meet its fiscal deficit due to unfavourable external conditions.  We see mid-curve FGN bond yields around 13.0 – 14.0% and yields at the longer end of the curve between 14.0% – 15.0% over the next one month”, Coronation Research said.

# Yields Mixed after DMO Sells Bonds at Higher Rates