Challenging setting for DMO auctions

At its latest monthly auction of FGN bonds, the DMO last week offered N90bn, attracted a total bid of N77bn and raised N67bn (US$220m) from sales. It offered the same paper as the previous month, and the marginal rates were higher for all three instruments by 19bps to 49bps. The auctions since April have seen a sharp fall in the total bid and a pick-up in rates. In June the DMO raised just N31bn, and still had to set higher rates: last week it perhaps answered the call to raise funds towards its target for the 2018 budget year, and collected twice as much.

  • It would appear that the domestic institutions are now less drawn to the returns on NTBs and more to the longer maturities in the FGN bond market. The overall modest bid last week was concentrated, as at the two previous auctions, on the longest maturity on offer (Feb ‘28s).
  • Our call is that FGN bond yields have settled on a plateau, with a slight upward bias, for the weeks ahead. We see evidence of fatigue on the part of domestic institutions and sense that the offshore community is guided by the normalization of US monetary policy. The returns on Nigerian paper are among the best in the EM universe for local currency government debt. We have often said that Nigeria enjoys some insulation from EM wobbles but it is not however immune from their impact.
  • The DMO has some breathing space because its domestic funding target in the 2018 budget has been cut to N790bn from N1.25trn the previous year.
Sales and demand at FGN bond auctions (N bn)

Sources: Debt Management Office (DMO); FBNQuest Capital Research

  • Budget and calendar years overlap of course but the DMO raised N1.45trn from its monthly auctions in 2017 and has achieved a further N490bn year-to-date. It now has additional products to offer such as the sukuk, and green and savings bonds.

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