Another Month, Another Good Auction For The DMO

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The DMO held its monthly auction of FGN bonds on Wednesday. It offered its regular NGN150bn, raised NGN175bn (USD430m) and secured a total bid of NGN282bn. The marginal rates on the ten and 15-year benchmarks rose by 85bps and 66bps from the previous month respectively. The reopened 30-year instrument (Apr ’49) was offered for the first time since February 2020. The DMO has an onerous domestic funding target of NGN2.34trn towards the projected deficit of NGN5.60trn in the FGN’s 2021 budget. (Its external target is currently identical). By way of context, we recall that it collected a total of NGN1.66trn (gross) from FGN bond sales in 2020.

The DMO has now raised NGN1.09trn YTD at its bond auctions including non-competitive sales to public agencies. When we incorporate the smaller amounts it generates from the sale of other debt instruments such as Sukuk and green bonds, it is clearly on track pro-rata to meet the target for the year.

On Tuesday, the president sought the go-ahead from the National Assembly for additional external borrowing equivalent to USD6.18bn to finance in part the projected deficit in the 2021 budget.

When we try to align both the request and the chatter around a return to the Eurobond market with the budget, we should remember that the appropriation bill was based on an exchange rate of NGN379. Several statements from the FGN have insisted that the rate in the investors’ and exporters’ window (I&E) applies to all its transactions.

The retracement in rates/yields from the low point in October and November continues. It probably has a little further to run. We suspect that the DMO’s unprecedented funding target has become the main driver of the trend.

Domestic investors do have some choice in the naira-denominated fixed-income space. Corporate bond sales have picked up, and the continuing securitization of the previous administration’s domestic arrears could bring tradable issuance of another NGN1.5trn.

Some foreign portfolio investors (FPIs) outside the payments pipeline may be tempted back into the market by a little more retracement. More likely in our view, the domestic institutions will again make the running and the FPIs will generally stick with less complicated trades with similar (or better) returns elsewhere.

For next month’s auction, the DMO’s provisional issuance calendar shows that the Jul ’45s will replace the Apr ’49s as the long bond on offer. The coupon is five percentage points lower.

– Proshare

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