Improved Demand at the Latest Bond Auction – Coronation Economic Note

The Debt Management Office (DMO) held its monthly auction of FGN Bonds on Monday (16 October ’23). It offered N360bn but raised N334.8bn through re-openings of 14.55% FGN APR 2029, 14.70% FGN JUN 2023, 15.45% FGN JUN 2038, and 15.70% FGN JUN 2053 bonds.

The participation level (demand) at this auction increased by 31.7% m/m to N383.1bn compared with N290.9bn recorded in September ’23. The bids for the 10, 10, 15, 30-year benchmarks were allotted at the marginal rates of 14.90%, 15.75%, 15.80%, and 16.60% respectively.

The bid-to-cover ratio stood at 1.2x.

The demand at this auction reflects improved system liquidity. This is in sharp contrast with September’s bond offering which recorded a relatively lower subscription of N290.9bn.

Inflows from FGN bond coupon payments, NTB maturity, and FAAC payout within the period boosted system liquidity as it outweighed outflows from NTB auctions. We note that market liquidity stood at N448.8bn while call, overnight and repo rates closed within the range of 1% – 6% as money market rates moderated on Friday (13 October ’23; i.e., the previous working day before the auction).

Looking ahead, we expect relatively healthy system liquidity in the coming months (November and December 2023) largely due to inflows from FGN bond coupon payments and NTB maturities. Based on our estimates, these maturities and coupon payments collectively amount to N1.2trn.

We note that demand was significant for the longer-tenure bonds (JUN 2038 and 2053 bonds) given their attractive yields (15.80% and 16.60% respectively). However, negative real interest rates (currently -7.95%) due to elevated inflation continue to dampen investor’s sentiments toward investing in FGN bond instruments.

The latest inflation report by the NBS shows September’s headline inflation increased by +92bps to 26.70% y/y. We understand that the new CBN Governor has not ruled out further rate hikes as a mechanism for combating inflationary pressures. Another moderate rate hike in the near-term is not far-fetched.

Domestic institutions remained the core participants at this bond auction. According to the latest monthly report released by Nigeria’s Pension Commission (PENCOM), the assets under management (AUM) of the pension industry increased by 18.7% y/y and 1.8% m/m to N17.1trn in July ‘23. FGN bonds accounted for 62.8% of total assets under management.

The DMO is set to raise a maximum of N4.8trn in FY 2023 through FGN bond issuances.

However, YTD, it has raised N4.6trn (meeting 95.8% of its target). Overall, we maintain our stance that the FGN is likely to exceed its domestic borrowing target of N7.04trn by end2023.

In a separate report, the DMO disclosed that it offered N150bn but raised N350bn through the issuance of its sixth Sovereign Sukuk Bond. The interest rate for the 10-year instrument was pegged at 15.75% per annum.

We note that the bond was oversubscribed as demand stood at N652.8bn. According to the DMO, the funds raised would be channeled towards the construction and rehabilitation of critical infrastructure projects such as roads and bridges across the country.

Over the next one month, we see mid-curve FGN bond yields in the secondary market around 14.9% – 15.5% at the short-end of the curve and yields at the longer-end of the curve between 15.0% – 16.5%