March 26, 2021/Proshare

By FBNQuest Research 

The DMO conducted its monthly auction of FGN bonds on Wednesday. It offered NGN150bn, raised NGN262bn (USD640m) and secured a total bid of NGN333bn. It will be pleased by the size of the total bid, which was the highest since September (NGN350bn). The marginal rates on the ten, 15 and 25-year benchmarks rose by 25bps, 25bps and 20bps respectively. The DMO could, of course, have accepted fewer bids and set lower marginal rates. However, it has been set an aggressive domestic funding target of NGN2.34trn towards the projected deficit of NGN5.60trn in the FGN’s 2021 budget, subject to revision. (Its external target is identical). As a reference point, we recall that the DMO collected NGN1.66trn (gross) from bond sales in 2020. 

In Q1 the DMO has now raised NGN635bn at its bond auctions including non-competitive bids from public agencies.  When we allow for the smaller amounts it generates from the sale of other debt instruments such as sukuk, we can see that it is on track pro-rata to meet the target for the year.  

The retracement in yields from the low point in November and December will be popular with the PFAs, which held close to 60% of their AUM in FGN bonds at end-January. When we add corporate bonds and state government issuance, the ratio for fixed-income exposure rises above 67%. 

It is possible that a little more retracement will lure some foreign portfolio investors (FPIs), particularly those not in the payments pipeline, back into this market. Our hunch, however, is that the PFAs and other domestic institutions will again make the running, and that the FPIs will generally stick with less complicated trades with comparable (or better) returns elsewhere in the EM universe.  

The DMO’s newish medium-term debt strategy has an optimum 70/30 split between domestic and external obligations in total public debt. The total at end-December was 61/39. The DMO’s targets for 2021 may be identical but we should remember the continuing programme of naira-denominated pro-note issuance in favour of creditors of the previous administration.  

This programme has perhaps a further NGN1.5trn to run, subject to the necessary dual verification of claims, and we should add the proposals to securitize the FGN’s ways and means advances from the CBN, estimated at NGN13.2trn as at end-September by Fitch Ratings.

Sales and demand at FGN bond auctions (NGN bn)

Sources: Debt Management Office (DMO); FBNQuest Capital Research