Another Decent Bond Auction for the DMO – Coronation Merchant

The DMO held its monthly auction of FGN bonds on Monday last week. It offered N225bn but raised N226.1bn (USD536.5m) through re-openings of the 2025, 2032 and 2042 FGN bonds.  Demand was considerably higher, as the DMO secured a total bid of N552.4bn.

The successful bids for the 3, 10 and 20-year benchmarks were allotted at the marginal rates of 10.1% (previously; 10.0%), 12.5% (unchanged) and 13.2% (previously; 13.0%) respectively from the auction conducted in May ‘22.

Coronation Merchant analysts observed that the DMO has a domestic funding target of N3.53trn and an external funding target of N2.56trn. This is to finance the projected deficit of N7.35trn in the FGN’s 2022 budget.

Based on the DMO’s bond issuance calendars, the debt management office set out to raise a total volume of between N1.1trn – N1.2trn in H1 ‘22. However, the DMO has raised N1.8trn at its bond auctions which include non-competitive sales to public agencies.

Allowing for the smaller amounts the FGN raises from the sale of other debt instruments such as NTBs and savings bonds, it is on track pro rata to meet the domestic borrowing target for the year.

On external borrowing, in March ’22, the DMO raised USD1.25bn (N526.8bn) through Eurobonds. However, In May ‘22, the finance minister stated that Nigeria is unlikely to borrow from the international capital market in the near-term. This is as a result of worsening external financing conditions as advanced economies tighten their monetary
policies to combat rising inflation.

Coronation Merchant notes that the average yield in the Eurobond market for sovereigns under our coverage has increased to 12.9% (as at 30 June ’22 ) from 7.2% at end-2021. Therefore, Coronation Merchant expects increased borrowings in the domestic debt market. However, the DMO’s bond issuance calendar for Q3 ’22 is yet to be published.

FGN bonds represented 70.7% of total FGN domestic debt as at end-March ’22, compared with 72% at end- December ‘21. It is worth highlighting that investors also have access to alternative fixed-income instruments such as corporate bonds and commercial papers.

According to the FMDQ, as at 30 June ’22, the collective market capitlisation of these instruments stood at N1.5trn.

Nigeria’s domestic fixed income market has been dominated by local investors since the peak of the pandemic in 2020. The participation of foreign portfolio investors in recent auctions has been minimal.

The latest monthly report by National Pension Commission (PENCOM) show that as at end-May ’22, FGN bonds held by pension fund administrators had increased by 3% m/m and 10.4% y/y to N8.5trn.

The PENCOM report shows that FGN bonds accounted for 59.7% of total assets under management, compared with 61.5% recorded in the corresponding period of 2021.

Although, the long-tenure nature of FGN bonds (with maturities of up to 50 years) contributes to the attractiveness of this asset class. YTD average yield in the secondary market for FGN bonds has declined by 37bps.