June 25, 2021/Proshare

By FBNQuest Research

On Wednesday, the DMO held its monthly auction of FGN bonds. It offered its regular NGN150bn, raised NGN326bn (USD790m) and secured a total bid of NGN418bn. The marginal rates on the ten and 15-year benchmarks declined by 36bps and 50bps respectively from the previous month. The DMO was to have offered the Jul ’45s but sold the Mar ’50s in lieu at a marginal rate of 13.70%. Wednesday’s auction has to be viewed as another exemplary effort by the DMO. It has an onerous domestic funding target of NGN2.34trn towards the projected deficit of NGN5.60trn in the FGN’s 2021 budget. By way of context, we recall that it collected a total of NGN1.66trn (gross) from FGN bond sales in 2020. 

Over six months the DMO has now raised NGN1.42trn at its bond auctions including non-competitive sales to public agencies. When we add the smaller amounts it generates from the sale of other debt instruments such as sukuk and green bonds, it is clearly on track pro rata to meet the target for the year.  

The retracement in rates/yields from the low point in October and November continues. It probably has a little further to run. The DMO’s unprecedented funding target, which was a 40% plus increase on the previous year’s (itself already a record), has surely been the main driver of the retracement.  

Domestic investors do have some choice in the naira-denominated fixed-income space. Corporate bond sales have picked up: issuance by Nigerian corporates increased by 52% in 2020 to NGN1.02trn, divided between commercial paper (75% of the total) and bonds. A prominent ratings agency sees similar corporate issuance this year.  

Further, the continuing securitization of the previous administration’s domestic arrears could bring tradable issuance of another NGN1.5trn. Looking further ahead, there has been talk of the same treatment of the FGN’s Ways and Means advances from the CBN, estimated at up to NGN10trn. The new debt instruments, held by the CBN, might subsequently become tradable in the market. 

All said, the domestic institutions are still the core buyers of the bonds, which accounted for 60% of the assets under management of the PFAs at end-April.   

Some foreign portfolio investors (FPIs) outside the payments pipeline may be tempted back into the market by a little more retracement. 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.  

In the first week of July we hope to see the DMO’s issuance calendar for Q3 ’21. It generally takes soundings from domestic institutional investors before its release.

 Sales and demand at FGN bond auctions (NGN bn)

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