October 21, 2021/United Capital Research
Yesterday, the Debt Management Office (DMO) conducted the October bond auction, offering to sell N150.0bn worth of bonds across the 2026s, 2037s and 2050s. The auction was met with decent investors’ interest as the 2026s, 2037s and 2050s recorded bid-to-cover ratios of 0.9x, 1.6x and 2.4x, respectively. Overall, the auction received a total bid of N250.7bn, implying a bid-to-cover ratio of 1.7x. That said, we note that bid levels at the auction continue to follow the weakening trend observed at the September bond auction. To give perspective, the bid-to-cover ratio of 1.7x in October’s bond auction pales in comparison to the last three bond auctions (Jul – 1.9x, Aug – 2.4x, Sept – 2.2x). We think this corroborates evidence of weak liquidity in the bonds market while investors remain passive in the face of aggressive government debt capital raise.
Overall, marginal rates at the October auction closed northwards with the rates closing at 11.65% (previously 11.60%), 12.95% (previously 12.75%), and 13.20% (previously 13.00%) on the 2026s, 2037s and 2050s, respectively. In line with the trend observed at recent auctions, the DMO oversold the auction, selling N192.8bn worth of bonds against the N150.0bn offered. Clearly, this reflects the funding pressures on the fiscal coffers of the Federal Government (FG). Despite the issuance of Eurobonds, the underperformance of revenue (67.8% performance as of Aug-2021) and unrelenting expenditure needs (94.0% performance as of Aug-2021) continues to widen FG’s deficit. As a result, there is a continuing over-reliance on the domestic debt market for funding needs.
Looking ahead, we expect sentiments in the bonds market to remain bearish as the secondary markets reprice bonds to auction levels. In addition, we anticipate short sellers would begin to trade in the market which would further push yields higher in the near term. Also, we note that short and mid-tenor bonds in the secondary market are trading at a premium, relative to auction pricing. The 2026s and 2037s closed trading (as of 20th October) at 10.90% and 12.89%, compared to 11.65% and 12.95% at the recent auction. Thus, these bonds could see increased short selling activities in the near term, driving yields higher.
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