The same menu for FGN bond investors

The DMO’s provisional issuance calendar for Q1 2019 shows that it seeks to raise N360bn to N440bn from sales of FGN bonds, and that it is offering the same combination of its five, seven and ten year benchmarks. We had hoped to see some new dishes on the menu for investors. The quarter falls within the 2018 budget year, in which the DMO has a domestic funding target of N790bn on top of a refinancing requirement of N300bn. It has raised N370bn (gross) from FGN bond sales since June, when the president signed off the budget.

  • Our chart shows a downward trend for sales over the past 12 months. The auction in December did not help: the DMO raised just N6bn because it rejected the vast majority of bids in an attempt to hold down its borrowing costs. This month’s auction next week will tell whether it has been successful.
  • Foreign portfolio investors have been exiting the market in recent months although recent signals about the pace of US monetary normalization may persuade some to change their thinking. The pension funds remain the core investors at auction, having few alternative fixed-income investments to consider and having declined to move back into equities.
Sales and demand at FGN bond auctions (N bn)

January 24th Graph

Sources: Debt Management Office (DMO); FBNQuest Capital Research
  • Our take on the market has the yields rising by up to 100bps in the months ahead, driven mostly by the CBN’s mopping up of naira liquidity.
  • The FGN’s 2019 budget proposals project a deficit of N1.95trn, which is to be covered by asset sales (N300bn) and borrowing (N1.65trn, divided equally between domestic and external sources). Since the passage of the budget generally takes six months from start to finish, and since the National Assembly is currently preoccupied, we would be surprised if the 2019 budget is approved before the end of the transition period in May.

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