In just four months, the Debt Management Office (DMO) has generated N3.1 trillion from investors in the debt capital market through the issuance of local notes. The country’s budget deficit, which is estimated to be in the billions of naira, is being financed in part by the selling of local bonds to investors.
The proceeds from the issuance of bonds went toward financing the 2024 budget with N1.8 trillion coming from outside sources and N6.1 trillion coming from local sources.
The DMO offered licensed dealers N450 billion at the most recent primary market auction, which took place on Monday. However, investors wishing to lodge their money in government borrowing instruments oversubscribed, bringing in N626.8 billion.
The funds were raised by reopening the 18.50% FGN FEB 2031 and issuing fresh 19.300% FGN APR 2029 , and 19.00% FGN FEB 2034, according to auction results posted on its website.
The results revealed that the bids received at the auction on Monday were allotted at the marginal rates of 19.30%, 19.75%, and 20.00% respectively.
Amidst inflation surge and high interest rate environment, the bond market has attracted investors’ interest. By pattern, demand for FGN bonds has been relatively strong amidst changing market dynamics.
DMO latest auction results showed that investors’ subscription or demand was higher at N920.1 billion, compared with N615 billion at the March auction. In its market note, Coronation Research stated that the bid-to-cover ratio stood at 1.47x as compared to the 1.01x recorded in the previous auction.
Separate fixed income traders and market analysts said demand at this auction primarily reflects improved system liquidity as call, overnight, and repo rates closed within a range of 6% – 30%.
The market recorded substantial demand for longer-tenured bonds, such as the FEB 2034 bond with total of N150 billion offered while N461.8 billion was allotted to market participants. According to Coronation Research note, domestic institutions remain the core participants at the FGN bond auction.
Citing latest monthly report by the National Pension Commission (PENCOM), Coronation Research said FGN bonds held by pension fund administrators as at end- February ’24 increased by 22.8% year on year to N11.7 trillion.
Reflecting pension fund managers increase appetite, this translated to about 22% growth from N9.6 trillion recorded in the corresponding period of 2023. The pension commission report shows that FGN bonds accounted for 59.5% of total assets under management (AUM).
This is coming at a time when headline inflation continue to accelerate, resulting in negative interest yield versus relative okay equities market performance. Naira Skids as FX Turnover, External Reserve Decline
In March, inflation rate increased by 150 basis points to 33.2%. Broadstreet analysts’ consensus favour an upward trend following sustained price instability. “We expect to see another uptick in April’s headline inflation.
“Our view is partly hinged on the recent implementation of new electricity tariff, which further exerts pressure on purchasing power and impacts the cost of doing business amid structural issues such as insecurity, supply chain issues and epileptic power supply, among others”, Coronation Research said.
After interest rate adjustment to 24.75% in March, analysts said they suspect another monetary policy rate hike given elevated inflation levels and the CBN’s desire to reduce the negative real interest rates.
Amidst efforts to reduce credit creation by banks, the CBN has slashed loan to deposit ratio (LDR) for deposit money banks to 50% from 65% – since January 2020.
In 2024, DMO has raised N3.1 trillion from the sale of FGN bonds. Given the size of the FGN’s borrowing plans for 2024, Coronation Research expects yields in the secondary market for FGN bonds to trend upwards.
“We currently see yields at the mid-curve around 18.3%-22.0% and between 18.6% – 22.0% at the longer end of the curve over the next month”, the firm said.
