Nigeria’s Debt Management Office (DMO) has raised N1.9 trillion for the government through the issue of bonds instruments in less than three months of the fiscal year 2023, exceeding 58% of the agency’s initial plan.
The money generated thus far this year is intended to cover the budget shortfall caused by the government’s earnings falling short of total required spending. Nigeria still struggles with budgetary slippage as a result of its failure to reach its oil production goals.
The DMO launched its monthly auction of FGN bonds last week, inviting market participants—primarily administrators of pension funds, who handle more than 60% of their assets in government bonds—to subscribe for N360 billion.
Demand was robust during the auction, but slowly because of the strain on the banking system’s liquidity as investors start looking for bigger returns on their investments. The 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037, and 14.80% FGN APR 2049 FGN bonds were reopened by the DMO in order to raise N563.2 billion.
Demand decreased by 22.6% to N808.4 billion from N991.9 billion recorded in February, breaking the previous auction record, despite a seesawing yield curve in the fixed income market.
Separate comments from analysts indicate that spot rates of 14.00% (previously 13.90%), 14.75% (previously 14.90%), 15.20% (previously 15.90%), and 15.75% (previously 16.00%), respectively, were attracted to bids for the 5-year FGN Bonds, the 9-year Bonds, the 15-year Bonds, and the 27-year Bonds.
Bid-to-cover stood at 1.4x. In its research note, Coronation Limited revealed that the DMO has now raised NGN1.9 trillion at its bond auctions, exceeding its borrowing target (via FGN bonds) by 58.3% in Q1-2023.
“It is clearly on track pro rata to meet the target for the first half of 2023”.
Recall that the monetary policy committee of the Central Bank of Nigeria raised the policy rate by 50 basis points to 18% at its latest meeting held in March.
Analysts said the tightening is expected to offset the upward risk in price development and narrow the real interest rate gap, saying there was a slight uptick in the average FGN bond yield in the market following the 50bps rate hike.
Currently, the gap between the monetary policy rate and the headline inflation rate is -3.9%, according to Coronation Research.
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 the end of 2022.
Some foreign portfolio investors (FPIs) outside the payments pipeline may be tempted back into the market by a little more retracement, according to Coronation analysts.
“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”, the firm stated.
These maturities and coupon payments collectively amount to N1.45 trillion, which is expected to saturate the liquidity profile of the financial market. Thus, analysts said a slight moderation in the avenge yield of fixed income instruments is likely.
In the second half of 2023, analysts projected that the liquidity levels in the financial system will 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, Coronation Research analysts said they 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%.
