A stalling operation by the DMO at auction

The DMO held its latest monthly auction of FGN bonds last week, offering N70bn between the same three instruments for the ninth month in succession. It attracted a total bid of N94bn and raised just N6bn (US$20m) from sales. The marginal rates were flattish on the previous month in a market where investors pushed for higher returns, in some cases above 16.00%, because the DMO rejected the vast majority of bids. In the past, when it has taken such a stand against uncomfortably high investor expectations, it has fallen into line at the following monthly auction.

  • The DMO has raised N763bn (gross) from bond auctions this calendar year and N368bn since June, when the new budget was signed off. (Additionally, it has a refinancing requirement of about N300bn this budget year.) It is therefore well-placed in the context of the N790bn target for domestic financing within the 2018 budget.
  • There are no sizeable FGN bond maturities in Q1. The DMO can also take comfort from the Eurobond issue, which has covered its external funding target of US$2.8bn equivalent for the current budget year in full.
  • The FGN’s cost of borrowing remains well below what we understand is the assumed average rate in the same budget.
Sales and demand at FGN bond auctions (N bn)

Sources: Debt Management Office (DMO); FBNQuest Capital Research
  • The bid for the two shorter maturities was negligible, so we hope to see new issues in the Q1 2019 issuance calendar.
  • The CBN accelerated its mopping up of liquidity in mid-month through OMOs so the higher bids last week were not a surprise. The macro climate has also deteriorated with the falling oil price and the presentation of the 2019 budget to the National Assembly with a US$60/b oil price threshold.

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