March 29, 2024/Coronation Economic Note

The DMO held its monthly auction of FGN Bonds on Monday (18 March ’24). It offered N450.0bn but raised N608.8bn through new issuance of the 19.94% FGN MAR 2027 and re-openings 18.50% FGN FEB 2031, and 19.00% FGN FEB 2034. The bids were allotted at the marginal rates of 19.94%, 20.00%, and 20.45% respectively. The demand at this auction was lower at N615.0bn, compared with N1.9trn at the February auction. The bid-to-cover ratio stood at 1.01x as compared to the 1.27x recorded in the February auction.

The demand at this auction primarily reflects system liquidity on the back of recent FGN bond maturity and coupon payments. Notably, opening market liquidity was reported at N1.3trn on Friday (the previous working day before the bond auction).

Call, overnight, and repo rates closed within a range of 5% – 32% as rates in the money market tightened. We note substantial demand for longer-tenured bonds, such as the FEB 2034 bond (N150bn was offered, while N275.8bn was allotted).

Domestic institutions were the core participants at the auction. According to the latest monthly report by the National Pension Commission (PENCOM), FGN bonds held by pension fund administrators as at end- January ’24 increased by 27.5% y/y to N11.6trn vs N9.1trn recorded in the corresponding period of 2023. The PENCOM report shows that FGN bonds accounted for
59.4% of total assets under management (AUM).

February ’s headline inflation increased by +180bps to 31.7% y/y. We expect to see another uptick when the NBS releases its March inflation figure. Our view is partly hinged on structural issues impacting the cost of doing business such as insecurity, supply chain issues and epileptic power supply, among others.

In February the CBN/MPC hiked the MPR by +400bps from 18.75% to 22.75%. At its latest meeting the MPC voted for another rate hike but by +200bps. We anticipate continuous monetary policy tightening, given elevated inflation levels and the CBN’s desire to reduce the negative real interest rates (currently: -6.95%) and attract foreign portfolio investors.

We note that YTD, the FGN has raised N2.5trn form the sale of FGN bonds. However, given the size of the FGN’s borrowing plans for 2024, (N6.1trn from domestic sources, and N1.8trn from external sources), we expect yields in the secondary market for FGN bonds to trend upwards.

We currently see yields at the mid-curve around 18.3% – 22.0% and between 18.6% – 22.0% at the longer end of the curve over the next month.

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