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A Challenging Bond Auction for the DMO – Coronation Merchant Bank

The DMO held its monthly auction of FGN bonds yesterday. It offered N225bn but raised N200.9bn (USD466.5m) through re-openings of the 2025, 2032 and 2042 FGN bonds.

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Bonds- Investors King

The DMO held its monthly auction of FGN bonds yesterday. It offered N225bn but raised N200.9bn (USD466.5m) through re-openings of the 2025, 2032 and 2042 FGN bonds.

The participation level was higher when compared to the auction held in July. However, total subscriptions remained lower when compared with the average of the first six months of 2022. The DMO secured a total bid of N247.1bn (USD574.6m) at the bond auction held yesterday.

The bids for the 3, 10 and 20-year benchmarks were allotted at the marginal rates of 12.5% (previously; 11.0%), 13.5% (previously; 13.0%) and 14.0% (previously; 13.7%) respectively.

The relatively low demand at the auction mirrors tight system liquidity. We note that market liquidity stood at a deficit of -N3.6bn on Friday (12 August ‘22). Overnight and repo rates closed within a range of 12 – 15%. 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 has contributed to investors’ apathy towards FGN bond yields. The latest inflation report released by the NBS shows July’s headline inflation increased by 104bps (when compared with the previous month) to 19.64% y/y. This is the highest reading since 2005.

Meanwhile, average yield in the secondary market for FGN bonds is 12.7% (as at 16 August ’22). 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. The MPC/CBN raised the policy rate by 100bps from 13% to 14% in July ‘22. However, given the upward trend in inflation, expectations of another rate hike is not far-fetched.

The DMO had set out to raise a maximum of N1.9trn by end -Q3 ’22. However, year-todate, it has raised N2.1trn. exceeding its target by 12% or N220bn. Given that the debt management office is expected to offer instruments worth N221 – 240bn through reopenings of the 13.53% FGN MAR 2025, 12.50% FGN APR 2032 and 13.00% FGN JAN 2042 bonds in September, the DMO is likely to exceed its borrowing target for FGN bonds by end -Q3 ’22.

Allowing for the smaller amounts which the FGN raises from the sale of other debt instruments such as NTBs and savings bonds, DMO is on track pro rata to meet or exceed the domestic borrowing target for the year set at N3.53trn.

The FGN was unable to meet its revenue target for Jan – Apr 2022, it underperformed by 51%. FGN’s retained revenue stood at N1.63trn, compared to the prorate target of N3.32trn. Debt service (N1.94trn) accounted for 119% of the FGN’s revenue in April ‘22.

In the near term, we expect increased borrowing (via FGN bonds) to result in 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.

However, the level of system liquidity (impacted by items such as auctions, CRR debits/refunds, bond/NTB maturities, coupon payments and FAAC allocation) would also influence movement in yields.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Bonds

Another Decent Bond Auction for the DMO

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Naira Dollar Exchange Rate - Investors King

The DMO held its monthly auction of FGN bonds on Monday (20 March ’23). It offered N360bn (USD780.1m) but raised N563.2bn (USD1.2bn) through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037, and 14.80% FGN APR 2049 FGN bonds.

The participation level (demand) at this auction declined by -22.6% to N808.4bn (USD1.7bn) compared with N991.9bn (USD2.1bn) recorded in February ’23. The bids for the 5, 9, 15, and 27-year benchmarks were allotted at the marginal rates of 14.00% (previously 13.90%), 14.75% (previously 14.90%), 15.20% (previously 15.90%), and 15.75% (previously 16.00%) respectively. Bid-to-cover stood at 1.4x

YTD the DMO has now raised NGN1.9trn at its bond auctions, exceeding its borrowing target (via FGN bonds) by 58.3% in Q1 ’23. It is clearly on track pro rata to meet the target for H1 2023.

The MPC/CBN raised the policy rate by 50bps to 18% at its latest meeting held in March. Further tightening is expected to offset the upward risk in price development and narrow the real interest rate gap. There was a slight uptick in the average FGN bond yield following the 50bps rate hike. We note that MPR – Inflation is currently at -3.9%.

The domestic institutions are still the core buyers of the bonds, which accounted for 61.5% of the assets under management of the PFAs at end-December ‘22. Some foreign portfolio investors (FPIs) outside the payments pipeline may be tempted back into the market by a little more retracement. More likely in our view, the domestic institutions will again make the running and the FPIs will generally stick with less complicated trades with similar (or better) returns elsewhere.

Looking ahead we expect a small boost to system liquidity due to an FGN bond maturity, NTB maturity, bond coupon payments and an OMO maturity in April and May. These maturities and coupon payments collectively amount to N1.45trn. A slight moderation in the avenge yield of fixed income instruments is likely.

In H2 2023 liquidity is expected to reduce while domestic borrowing increases, potentially resulting in further upticks in yields. However, the level of system liquidity largely impacted by items such as auctions, CRR debits/refunds, bond/NTB maturities and coupon payments would influence the movement in yields.

Over the next month, we see the mid-curve FGN bond yields around 13.7% – 14.9% and yields at the longer end of the curve between 13.5% – 15.8%.

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Bonds

Nigeria Raises N724.9 Billion in February 2023 Federal Government Bond Auction

A total of 577 bids worth N724.9 billion were received for the N360 billion amount offered, with the total amount allotted being N771.56 billion.

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Bonds- Investors King

The Debt Management Office (DMO) in Nigeria has announced that it raised N724.9 billion in the Federal Government bond auction held on February 13, 2023.

This marks a 100% increase compared to the previous year. A total of 577 bids worth N724.9 billion were received for the N360 billion amount offered, with the total amount allotted being N771.56 billion, Investors King reports.

Successful bids were allotted at marginal rates of 13.99%, 14.90%, 15.90%, and 16.00%, respectively, for the 10-year, 10-year, 20-year, and 30-year bonds. The auction was part of the DMO’s efforts to raise funds for the implementation of the Federal Government’s 2023 budget and to finance critical infrastructure projects across the country.

While Nigeria’s rising debt profile has been a topic of concern, the DMO has been actively promoting the issuance of FGN bonds as a means of diversifying the country’s funding sources and reducing its dependence on short-term borrowing.

The FGN bond market has grown significantly in recent years, with a wide range of maturities and attractive yields for investors.

The success of the February 2023 FGN bond auction highlights the continued strong demand for FGN bonds and the government’s commitment to meeting its funding needs through the capital markets.

The settlement date for the auction was February 15, 2023, and the bonds will mature between February 2028 and April 2049.

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Bonds

FCMB to Issue N30 Billion Series I Additional Tier 1 Bond

FCMB Group to borrow N30 billion from the debt market

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FCMB - Investors King

FCMB Group Plc, one of Nigeria’s leading tier II financial institutions, has perfected plans to raise N30 billion from the debt market via bond issuance.

The group disclosed this in a statement signed by Funmi Adedibu, Company Secretary on Tuesday, January 24, 2023, and obtained by Investors King.

The N30 billion series I bond is an additional bond under the bank’s N300 billion debt issuance programme. The announcement was done after the group completed the registration of its N300 billion debt issuance programme with the Securities and Exchange Commission and received approval.

Debt issuance is a method used to raise funds by both the government and public companies through the sale of bonds to external investors. 

In part, the statement reads, “the Issuance represents the first non-sharia local currency AT1 instrument to be issued in Nigeria and has received CBN’s no-objection.”

“FCMB Group will commence the book build in respect of the Series I Bond on January 24, 2023.”

First City Monument Bank (FCMB), a member of FCMB Group Plc, is a financial services holding company headquartered in Lagos. FCMB Group Plc has nine subsidiaries divided among three business groups: commercial and retail banking, investment banking, and asset and wealth management.

 

 

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