July 21, 2022/United Capital Research

On Monday, the Debt Management Office (DMO) conducted its July FGN bond auction, its first auction in H2-2022. The DMO offered N225bn across three (3) tenors, the MAR 2025 (three-year bond), APR 2032 (10-year bond) and JAN 2042 (20-year bond). Overall, investor demand was lax as the instruments on offer were undersubscribed with an overall bid-to-cover ratio of 0.6x, with the 2025s, 2032s, and 2042s undersubscribed by 0.2x, 0.3x, and 1.4x, respectively. The DMO undersold the auction, allotting a total of N123.84bn vs N225.0bn on offer. 

In line with our expectations of an uptick in the yield environment in the sovereign bonds market, marginal rates across all the tenors climbed 90bps, 50bps, and 60bps to print at 11.00%, 13.00% and 13.75%, respectively. Investors opted toward a more relaxed approach in the auction, demanding higher yields, as the expectation of inflation, interest rates, and political risks all begin to crystalise. Following persistent inflation, monetary policy normalisation globally and the increased perception of political risk as we approach the electioneering season.

We expect a continued uptick in marginal rates at subsequent bond auctions, as we believe investors will remain standoff-ish. The DMO will need to reel in higher rates to attract fund managers’ interests. Also, the recent hawkish stance adopted by the CBN, hiking rates by 250bps in total (100bps at July’s MPC meeting), will drive investor’s appetite for increased rates. Notwithstanding, we maintain the FG’s apparent need to rely on the domestic debt market to fund its fiscal imbalance, as external debt market conditions remain unfavourable. These factors will further impetus for shifting pricing power away from the FGN/DMO and into the hands of private sector asset managers.