July 23, 2021/Proshare

by FBNQuest Research

The DMO held its monthly auction of FGN bonds on Monday. It offered its regular NGN150bn, raised NGN138bn (USD340m) and secured a total bid of NGN286bn. It offered ten, 20 and 30-year benchmarks, all different re-issues and the set menu through Q3 ’21 per its calendar. There are therefore no exact parallels with the marginal rates of the previous month. However, the trend remains downward and a conventional yield curve across the three debt instruments has been maintained. The bid was softer this month yet covered sales by a factor of two-to-one. Monday’s auction was another creditable 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. 

Ytd the DMO has now raised NGN1.66trn at its bond auctions including non-competitive sales to public agencies. This cumulative figure is gross, ie before the repayment of bonds on maturity. When we include the relatively small amounts it generates from the sale of other debt instruments such as sukuk, it is clearly on track pro rata to meet the target for 2021.  

Although the last two auctions have brought a slight decline in rates, there has been nonetheless a strong retracement in rates/yields of roughly 600bps-750bps along the curve from the low point posted in October and November. 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.  

The FGN bonds are not the only game in town but they dominate the fixed-income space. Their combined market capitalization amounts to NGN11.75trn according to FMDQ data, compared with NGN170bn for state government issuance, NGN300bn for commercial paper and NGN680bn for corporate bonds. The last category registered strong growth in 2020 thanks to issuance from two household names in cement, one of which smartly raised NGN115bn for seven years in December with an annual coupon of just 7.50%.  

Given this prevalence of FGN bonds, it is not a surprise that they accounted for 60% of the assets under management of the PFAs at end-April.  They offer maturities out to 30 years, which is another selling point for the pension funds for matching purposes.  

Foreign portfolio investors (FPIs) appear to have sat on the sidelines. Quite apart from the matter of the pipeline (whatever its size), they have the luxury of less complicated trades with similar (or better) returns elsewhere.

 Sales and demand at FGN bond auctions (NGN bn)

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