An uncomfortable auction for the DMO

The DMO’s review of Wednesday’s monthly auction of FGN bonds is likely to focus on the lowest total bid since November and the increase in marginal rates on the level of the previous month. When it drills down into the results, it may ask why the bid for the long bond (Apr ’37) slumped to a record low of N33bn and whether the PFAs, the core players in the auctions, have developed fatigue. The late FAAC payout was probably a contributory factor. For the record, the offer at the auction was N135bn and the total bid N64bn, while sales amounted to N56bn (US$180m).

The DMO’s review will likely also dwell on its position of relative strength, given its front-loading of issuance. It has now raised N1.02trn in eight months towards the target of N1.25trn for domestic financing of the 2017 budget deficit. The FGN bonds are the principal element in the financing although the DMO can look to the retail savings bonds and the planned sukuk for modest contributions.

Yet it cannot rest on its laurels because the deficit may overshoot in view of poor non-oil revenue collection and because there are uncertainties surrounding the attainment of the target of N1.07trn (US$3.5bn at the budget rate of N305) for external financing of the deficit.

The marginal rates were the highest since January. In part, this reflects the poor total bid. Once the FGN’s debt restructuring proposal is approved and launched, we hope to see a narrowing of yields on the FGN’s naira-denominated paper, starting with the NTBs.

The provisional issuance calendar for Q3 2017 has the same three bonds on offer in September.

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