April 27, 2022/United Capital Research

At the start of the week, the Debt Management Office (DMO) conducted its April FGN bond Auction, offering to sell N225.0bn worth of bonds with the 2025s, 2032s and 2042s on offer. At the auction, investor demand was relatively healthy as 2025, 2032, and 2042 instruments were oversubscribed with bid-to-cover ratio printing at 1.5x, 1.0x, and 3.0x respectively. However, auction bids were unsurprisingly lower compared with the previous auction which had bid cover ratios of 3.1x and 4.9x. The declining subscription rate comes on the back of weaker sovereign instrument maturities in April. For context, a total bond maturity and coupon inflow of N215.2bn hit the system in April vs the N335.1bn inflow in previous month (March).

As a result of the mild demand, marginal rates for the 2042 instrument edged up by 20bps to close at 12.90% compared to the marginal rate of 12.70% on 2042 at the March auction. The 2025 and 2032 instruments had a marginal rate of 10.0% and 12.50% respectively. As expected, the DMO oversold the auction, selling a total of N348.6bn as against the N225.0bn it initially offered to sell. This confirms our expectations of aggressive government borrowing. Out of the N348.6bn it sold, N128.7bn (36.9% of total sales) were sold to non-competitive bidders which signals an attempt to curb the pace of reversal in yields, as selling to only competitive bidders would have seen the marginal rates close higher.

In line with our projections of an upward reversal of rates through Q2-22, which was based on the not-so-significant liquidity expected in the financial system within the period, we expect to see a further climb of marginal rates in subsequent primary market auctions. The FG’s sustained reliance on debt funding will also remain a key driver. Lastly, we note that non-competitive bidders do not participate in every auction, thus we note the possibility of a faster surge in marginal rates in May’s bond auction. In the secondary market, we expect investors will continue to price in the sustained reversal in bond yields during secondary market trading. As a result, we recommend active short-selling trade activities from investors while shunning long positions.