The DMO last week held its latest auction of FGN bonds, and raised N95bn (US$310m) from the sale as well as N9bn from non-competitive bids. It offered N105bn but saw only modest demand for five-year paper (July ‘21s). In part it compensated by raising more than planned from the ten-year and 20-year debt instruments on offer. The FGN is struggling to contain the soaring cost of domestic debt service, which is projected to absorb 34% of revenues in the 2016 budget. Yet it has to fund its deficit, for which external financing has been slow to materialise.
The DMO did achieve marginal rates (effective cut-off points) close to those of the previous monthly auction, and lower for the 10-year paper.
These are seemingly grounds for congratulation once we allow for headline inflation touching 18% y/y, a projected deficit this year of N2.20trn and the FGN’s plans for another expansionary budget in 2017.
While the total bid at auction has eased this year, to N173bn in October, the DMO can count on strong domestic institutional demand from the PFAs. The funds held 59% of their assets under management in FGN bonds in July, and their appetite for the paper, notably for matching purposes, shows no sign of cooling.
The offshore investor, meanwhile, sits on the sidelines. The yields may look attractive in an emerging market context if we overlook the matter of repatriations and the new fx regime that is some way from fully functioning.
This makes the PFAs even more important to the FGN’s deficit financing plans. We think that yields will tick upwards for solid macro reasons but grant the DMO a breathing space in the short term.