At this week’s monthly auction of FGN bonds, the DMO offered N100bn, attracted a total bid of N118bn and raised N80bn (US$260m) from sales. When we add that the marginal rate for the five-year benchmark (14.50% Jul ‘21s) rose for the second successive month and that the rate for the new ten-year bond was higher than that for the benchmark it has replaced, we might feel that the results were disappointing.
However, the DMO is in a stronger position than 12 months because of the FGN’s fiscal planning and debt strategy.
- · The FGN’s 2018 budget proposals are under discussion in the National Assembly. Our take is that the to-ing and fro-ing between the executive and the legislature is unlikely to be any smoother than in recent years. We understand, however, that the deficit in the proposals is projected at a lighter N2.0trn and repeat that the strategy remains to shift the balance of new borrowing to external markets.
- · Supply factors are therefore positive. Additionally, we feel that the FGN’s externalization of its debt will deliver further yield compression on naira paper. The proceeds of the recent US$2.5bn Eurobond sales are being deployed to refinance domestic debt.
- · By way of explanation for the decline in the total bid (see chart), we suggest possible fatigue with the offering (see below); a wait-and-see stance on the part of some investors as to the impact of externalization: and, perhaps, a review of asset allocations by some domestic institutions.
Sources: Debt Management Office (DMO); FBNQuest Capital Research
- The DMO is freshening up its offer at auction. The Jul ‘21s have been offered every month since their launch and will be available again next month. Yet the DMO will then issue a new seven-year instrument.