DMO Raises N418.2bn in FGN Bonds Auction, Demand Reflects System Liquidity – Coronation Economic Note

The DMO held its monthly auction of FGN Bonds on Monday (29 January ’24). It offered N360bn but raised N418.2bn through re-openings of the 16.29% FGN MAR 2027, 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2033, 15.45% FGN JUN 2038.

The bids were allotted at the marginal rates of 15.00%, 15.50%, 16.00%, and 16.50% respectively. The bid-to-cover ratio stood at 1.45x compared to 3.24x recorded in the December auction.

The demand at this auction primarily reflects system liquidity triggered by FAAC allocation and
coupon payments. Notably, market liquidity was reported at N210.4bn on Friday (the working day
before the bond auction).

Call, overnight, and repo rates closed within a range of 7% – 19% as rates in the money market moderated. There was significant demand for longer-tenured bonds, such as the JUN 2038 bonds (N90bn was offered, demand was N311.9bn while N266.7bn was allotted).

Domestic institutions were the core participants at the auction. According to the latest monthly report by the National Pension Commission (PENCOM), FGN bonds held by pension fund administrators as at end- December ’23 increased by 24.2% y/y to N11.5trn from N9.2trn.

The PENCOM report shows that FGN bonds accounted for 62.4% of total assets under management (AUM).

December’s headline inflation increased by +72bps to 28.92% y/y. We expect to see another uptick when the NBS releases its January figure. Our view is partly hinged on exchange rate volatility which is contributing to higher prices for imported goods.

Insecurity in specific regions is disrupting supply chains, leading to shortages and increased costs for essential goods. Rising fuel prices, influenced by changes in the global oil market, are having downstream effects on transportation and production costs.

The first MPC meeting under the tenure of the new CBN Governor, has been scheduled for 26th
and 27th of February 2024, we anticipate continuous monetary policy tightening, given elevated
inflation levels.

Based on the FGN 2024 Budget, the fiscal deficit is estimated at N9.1trn which is 3.88% of the
2024 estimated nominal GDP. The deficit is expected to be financed by new borrowings of N7.8trn
(N6.1trn from domestic sources, and N1.8trn from external sources). We expect domestic fixed
income yields to remain elevated.

For FGN bonds, we currently see yields at the mid-curve around 15.9% -16.3% and between 16.6% – 18.6% at the longer end of the curve over the next 3 months.