Since the start of the year, the Debt Management Office (DMO) has raised a total of N4.3 trillion from the local debt capital market. This corresponds to 70% of its annual aim for local borrowing from the debt market.
In order to finance the 2024 budget deficit, DMO has been selling bonds issued by the Federal Government of Nigeria to debt investors. The authority had intended to raise money on the foreign market, but the high interest rate on public debt seemed to be a barrier, given the high rate.
The most recent monthly auction had a low number of bidders as investors prefer to direct their money to places where they are treated well. It has been observed that a few capital raises by Nigerian banks contributed to the DMO auction subscription level being weak.
The DMO held its monthly auction of FGN bonds on July 22, 2024. It offered N300 billion but raised N225.7 billion through re-openings of the 19.30% FGN APR 2029, 18.50% FGN FEB 2031, and 19.89% FGN MAY 2033. The bids were allotted at marginal rates of 19.89% for a 5-year bond, slightly higher than 19.64% at the previous month’s auction.
A 7-year FGN bond was sold at a rate of 21% from 20.19% in the June auction, while a 10-year bond was sold at a spot rate of 21.98% versus 21.5% previously offered. Demand at this auction was lower at N279.7 billion, compared with N305.3 billion in June, according to Coronation Research note, with the bid-to-cover ratio stood at 1.24x.
At the July auction sales, the demand for the 10-year bond was bullish, with N100 billion offered and N200.65 billion allotted. This can be partly attributed to expectations of near-time moderation in headline inflation.
Domestic institutions remained the core participants at the FGN bond auction, Coronation Research said in its note. Citing the National Pension Commission (PENCOM) report, analysts noted that FGN bonds held by pension fund administrators increased by +25.6% year on year to N20.2 trillion vs. N16.1 trillion recorded in the corresponding period of 2023.
The PENCOM report shows that FGN bonds accounted for 60% of total assets under management (AUM) in May ’24. At the July Monetary Policy Committee (MPC) meeting, the benchmark policy rate was hiked by +50 bps to 26.75%. This was in line with our expectations. The real interest rate gap is now -7.4%, compared with the previous -7.9%.
“Based on our estimates, the DMO has raised cumulative c. N4.3 trillion year to date via FGN bond issuances, reaching 70% of the 2024 total domestic borrowing target of N6.1 trillion.”.
Given expectations of increased domestic borrowing in 2024, the DMO is likely to exceed its borrowing target, potentially leading to a sustained upward trend in fixed income yields, Coronation Research said.
