February 15, 2023/United Capital Research
On Monday, the Debt Management Office (DMO) conducted its February FGN bond auction in the primary market, with an offer of N360.0bn across four (4) tenors, FEB 2028, APR 2032, APR 2037, and APR 2049. At the auction, investors’ demand came in strong with overall bids summing up to N992.1bn implying a bid-to-cover ratio of 2.8x. The DMO opted to oversell the auction by an allotment rate of 1.8x, selling N662.6bn worth of papers across the tenors on offer. Notably, investors’ interest was mainly skewed toward longer tenors, as the bulk of investors bid to the tune of 52.6% (N522.1bn) of total bids came for the 2037s and 2049s.
Interestingly, marginal rates at the longer end of the curve climbed by 10bps a piece, the 2037s and 2049s, to settle at 15.9% and 16.0% from 15.8% and 15.9% respectively. The observed upward climb is largely down to the DMO’s decision to oversell the auction, as allotment-to-offer ratio for 2037 and 2049 printed at 2.5x and 2.7x respectively, indicating the FG’s strategy of frontloading debt issuances and a likely reliance of domestic debt to fund budget deficit. The marginal rate on the 2032s remained unchanged at 14.9% and attracted the least interest from investors at the auction, as it was undersubscribed by 0.9x. However, the marginal rate on the 2028s declined by 1bp to settle at 13.99% from 14.0%.
Looking ahead, we note the DMO’s strategy is aimed at frontloading debt issuances in 2023 with a focus on extending maturity of the FG’s debt profile. As a result, we expect to see supply of bonds concentrated at the long end of the curve, outweighing investor demand despite apparent system liquidity. As a result, we expect to see the yield curve steepen further as yields at the tail of the curve to trot higher. The strategy implication is for bond investors to shun long trading activities at the tail of the curve while short selling will be a preferred strategy, albeit with limited upside as yield curve volatility remains low. For obligated investors, minimizing duration exposure when picking bonds will be crucial to defending portfolios from further steepening of the yield curve.
