July 22, 2021/United Capital Research
Earlier on Monday, the Debt Management Office (DMO) conducted a FGN bond Primary Market Auction (PMA) with the following instruments on offer; 13.98% FGN FEB 2028 N50.0bn, 12.40% FGN MAR 2036 N50.0bn and 12.98% FGN MAR 2050 N50.0bn. At the auction, investor demand was healthy as the 2028, 2036 and 2050 instruments were oversubscribed by 1.1x, 1.5x and 3.1x, respectively. However, the auction bids were surprisingly lower compared with the previous auction which had bid-to-cover ratios of 1.3x, 2.6x and 4.5x. The surprisingly low bid levels came despite recent bond maturity and coupon inflows worth of N800.0bn. The low bid level at the auction appears a deliberate tactic by investors to create an illusion of weak demand to keep rates elevated.
That said, at the auction, marginal rates for the 2028, 2036 and 2050 instruments were lower by 39bps, 35bps and 45bps, respectively to close at 12.35%, 13.15% and 13.25%, compared to marginal rates of 12.74%, 13.50% and 13.70% on the 2027, 2035 and 2050 at the May auction. Interestingly, the DMO sold N138.1bn, against N150.0bn which it initially offered. We think this is a deliberate move by the DMO to signal to investors its intention to continue to drive interest rates lower.
Looking forward, we think the excess maturities yet to be absorbed at the NT-bills and bond auction will trickle into the secondary market as investors look to reinvest the funds. We expect this to force interest rates lower in the secondary bonds market, keeping in line with the overall downward outlook for the yield environment in Jul-2021.
Please CLICK HERE to download the report.