October 19, 2022/FBNQuest
The Debt Management Office’s (DMO) monthly bond auction which was held on Monday this week fell far short of the agency’s target. As usual, the DMO sought to raise NGN225bn, split equally across three maturities – the Apr ’29, Apr ‘32, and Apr ’37 maturities. It ended up raising c.NGN108bn out of total subscriptions of NGN119bn. The amount raised is the lowest this year and implies a sales-to-offer ratio of just 0.48x compared with 1.02x at its previous auction in September. Although the Apr ’32 and Apr ’37 were also available at the previous auction, the Mar ’25 was replaced with the Apr ’29, which is a reopening of a previously shelved issue.
The low level of demand at the auction was largely due to the tight level of financial system liquidity in recent weeks following the central bank’s monetary tightening measures.
A secondary and related factor is that the CBN has prohibited financial institutions that access its windows from taking part in bond and treasury auctions.
Marginal rates for the papers on offer were 14.5%, 15.0%, and 16.0% for the Apr ’29, Apr ’32, and Apr ’37 respectively. Relative to the prior auction, the marginal rates were about 115bps and c.150bps higher for the longer tenors – the Apr ‘32s and Apr ’37.
Marginal rates for the three benchmarks were also around 70bps, 89bps, and 60bps higher than those on the secondary market.
The DMO has raised around NGN2.2trn from its auctions so far this year. The gross amount is roughly NGN2.5trn when non-competitive allotments are considered.
If we include the agency’s net issuance of Treasury Bills this year, estimated roughly at around NGN660bn, it would have just around NGN300bn to meet its domestic funding target of NGN3.5trn.
Going forward, we expect yields to continue to be elevated due to tight liquidity conditions in the market.
The DMO has its work cut out for next year. According to the President’s 2023 budget proposal, the 2023 budget is expected to result in a fiscal deficit of NGN8.8trn, which is to be financed by domestic and foreign borrowings of NGN7.0trn and NGN1.8trn respectively.
