November 23, 2021/Proshare

by FBNQuest Research                                                                                                                             

The DMO held another successful auction of FGN bonds last week Wednesday. It offered the same menu of debt instruments namely the ten, 20 and 30 year benchmarks. In its usual manner, it offered NGN150bn, raised NGN225bn and attracted a total bid of NGN267bn. The marginal (stop) rates for the ten and 20 year bonds were unchanged from those of the previous month’s auction at 11.65%, and 12.95% respectively. However, while that for the 30 year benchmark (Mar ’50s) was up 10bps to 13.30%. The amount raised is 17% higher than what it raised the previous month, and is yet another commendable effort by the DMO. 

If we include non-competitive bids to government owned entities, the DMO has now raised a record sum of NGN2.6trn this year, just shy of its NGN2.74trn funding target (including the supplementary budget). The amount raised excludes the smaller sums generated from other debt instruments such as sukuks. 

Once again, we understand that the participation was mostly dominated by domestic investors. Foreign portfolio investors (FPI) have taken a back seat due to fx liquidity concerns. The backlog of delayed external payments has been whispered to be within a range of USD2-3bn. 

However, the DMO has willing takers in the local Pension funds. According to the latest monthly report (for September) by PENCOM, FGN bonds represented c.60% of total PFA assets under management. 

On the secondary market, we see that yields have gradually retraced across the curve by about 39bps since August. We believe that we may see further yield retracement over H1’22, as the DMO will likely front-load its supply of FGN paper in order to quickly get through another onerous domestic funding target of c.NGN2.5trn.  

On the external front, the progressive normalisation of monetary policy in advanced economies is anticipated to cause capital flow reversals away from emerging markets like Nigeria, putting further upward pressure on rates. 

The monetary policy committee (MPC) started its meeting yesterday and is expected to deliver its policy decisions later today. Our call is that the committee will leave its policy rate of 11.5% and other policy parameters unchanged. However, considering recent tightening by other central banks such as South Africa (25bps), Ghana (100bps) and Brazil (150bps), the MPC may feel compelled to make a token rate hike.

Sales and demand at FGN bond auctions (N bn)         

Sources: Debt Management Office (DMO) FBNQuest Capital Research