The DMO selective in its acceptance of bids

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At this week’s monthly auction of FGN bonds, the DMO played hard-to-get. It offered N100bn, secured a total bid of N149bn and raised just N29bn (US$90m) from sales. By rejecting the vast majority of bids, it succeeded in driving down the marginal rates by between 102bps and 144bps.

The result was a flat curve of 13.50%, rather than its preferred conventional form. The DMO was supported in its strategy by non-competitive bids totalling N92bn, enabling it to raise in excess of its offer. The bid was again concentrated on the ten-year benchmark.

  • The DMO has created a little flexibility for itself from earlier sales, having now raised N664bn competitively since June, when the 2018 budget was signed off. It is well-placed to achieve the N790bn domestic financing target.
  • The FGN’s cost of borrowing at auction remains well below what we hear is the assumed average rate in that budget.
  • According to the CBN, about 39 million adults are financially excluded in Nigeria, meanwhile, the country’s population continues to grow steadily at a rate of 3.0% y/y. An upward trend in internet subscriptions via mobile network operators creates an opportunity to boost financial inclusion through mobile money services.
  • Sales and demand at FGN bond auctions (N bn)

  • Sources: Debt Management Office (DMO); FBNQuest Capital Research
  • Foreign investors remain drawn to naira debt markets, particularly the longer tenor NTBs in the CBN’s open market operations.
  • In passing, we note that the impact of the policy rate cut by the MPC on secondary markets was fleeting.
  • Inflation having settled within a narrow range, the DMO may be tempted to offer new instruments such a long bond in its next issuance programme.
  • The DMO can do no more than hitting the funding targets it is set. Budgets tend to overshoot, however: so in 2017 the FGN deficit of N3.81trn was covered to the extent of N2.51trn by domestic and external borrowing through the DMO, leaving N1.30trn “unfunded”.
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FBNQuest Capital Research
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