Scope for the DMO to pick and choose

The DMO may have mixed feelings about the outcome of the fifth monthly auction of FGN bonds of the year, which it held last week. It sought to raise N140bn but managed just N105bn (US$340m). For the three-year benchmark (Jul ‘21s), it collected N10bn rather than its target of N40bn, such is its determination to contain the FGN’s borrowing costs. The marginal rate on the instrument was still 31bps higher than the previous month. However, the DMO’s successful front-loading of issuance in Q1 has given it some welcome room for manoeuvre.

In five months it has raised N750bn (gross) from its auctions of the bonds. While we have to wait for the sign-off by the acting president (or the president), it appears that the 2017 budget approved last week by the National Assembly has left unchanged the N1.25trn projection for net domestic borrowing. 
Other than February, it has become a challenge to sell the three-year paper at auction. More attractive returns are available for almost all NTBs. Additionally, the step-up in fx interventions by the CBN since March has reduced banks’ free funds to invest in debt markets.

More generally, we note the stirrings on the NSE in the past two weeks. The PFAs have been selectively among the buyers.


Scope for the DMO to pick and choose Sources: Debt Management Office (DMO); FBNQuest Research

That said, we expect the DMO to meet its target for the year without great difficulty, and with limited contributions from other FGN debt products such as the retail savings bond. Its front-loading has again been vindicated. Our assumption is that the balance of the projected US$3.5bn net external borrowing in 2017 will materialize (the multilateral lending under discussion).

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