July 26, 2024/Coronation Research

The DMO held its monthly auction of FGN Bonds this week (22, July ’24). It offered N300bn but raised N225.7bn through re-openings of the 19.30% FGN APR 2029, 18.50% FGN FEB 2031 and 19.89% FGN MAY 2033. The bids were allotted at marginal rates of 19.89% (previously: 19.64%), 21% (previously: 20.19%), and 21.98% (previously: 21.5%) respectively. Demand at this auction was lower at N279.7bn, compared with N305.3bn in June’ 24. The bid-to-cover ratio stood at 1.24x.

The relatively low demand at the auction reflects the current tight system liquidity. Notably, market liquidity stood at deficit of -N379.5bn on Friday (19, Jul ‘24). Call, overnight, and repo rates closed within a range of 9% – 32% as rates in the money market tightened.

The demand for the 9-year bond was bullish, with N100bn offered, and N200.65bn allotted. This can be partly attributed to expectations of near-time moderation in headline inflation. Domestic institutions remained the core participants at the FGN bond auction.

According to the latest report by the National Pension Commission (PENCOM), FGN bonds held by pension fund administrators increased by +25.6% y/y to N20.2trn vs N16.1trn recorded in the corresponding period of 2023. The PENCOM report shows that FGN bonds accounted for 60% of total assets under management (AUM) in May ’24.

At the July Monetary Policy Committee (MPC) meeting, the benchmark policy rate was hiked by
+50bps to 26.75%. This was in line with our expectation. The real interest rate gap is now -7.4%,
compared with the previous -7.9%.

Based on our estimates, the DMO has raised cumulative c. N4.3trn YTD via FGN bond issuances, reaching 70% of the FY 2024 total domestic borrowing target of N6.1trn. Given expectations of increased domestic borrowing in 2024, the DMO is likely to exceed its borrowing target, potentially leading to sustained upward trend in fixed income yields.

The secondary market for FGN bonds remains bearish as the average yield has increased by +532bps YTD. Over the next month we see yields at the mid-curve around 18.8% – 22.0% and long-curve 18.6% -22%.

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