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Expectations of higher yields on Nigeria’s local debt instruments on the back of rising global and local risks coupled with tight liquidity have undermined investor appetite for August Federal Government (FGN) Bonds as auction conducted Wednesday recorded its first undersubscription in 2 years.
Out of the N145 billion the Federal Government sought to raise through the Debt Management Office (DMO), across 3 instruments which are re-openings, only N95 billion total subscriptions were recorded, implying the DMO undersold at a bid-to-cover ratio of 0.7x. This is the first undersubscription across all the three instruments since August 2017.
“There was a very weak demand at the auction,” said Nnamdi Olisaeloka, a fixed-income analyst at Lagos-based Zedcrest Capital Ltd. “Yields on Nigerian Treasury Bills have become very elevated and that has dampened investor interest for bonds.”
The debt agency offered N40 billion for the five-year, N50 billion for the 10-year and N55 billion for the 30-year Bond with total subscription at N10.41 billion, N37.47 billion, and N47.21 billion, respectively.
DMO allotted N2.05 billion for the 5-year; N2.68 billion for the 10-year; and N10.3 billion for the 30-year bond, bringing the total amount sold at N15.03 billion. This is the lowest auction sale since December 2018 when the debt agency sold N5.75 billion across the instruments.
Allotments were made to successful bidders at the rate of 14.29 percent for the five-year, 14.39 percent for the 10-year and 14.590 percent for the 30-year Bonds. This indicates the auction yields cleared c.63bps higher from their previous levels.
Yields on Nigerian fixed-income instruments have been trending higher to 15 percent as offshore investors continued to sell off their assets on gloomy global economic outlook driven by escalating trade tensions in the global market, a move which mounted pressure on Naira.
The local currency has been trading above N362 to a dollar in the Investor & Exporter (I&E) window of the foreign exchange market but appreciated marginally to N363.77 per dollar on Wednesday after President Buhari allocated portfolio to his cabinet members.
“Total subscriptions received from both Competitive and Non-Competitive bids amounted to N139.58 billion,” the DMO said in a statement which accompanied the auction results. “The strong demand from investors for the FGN Bonds offered at the Auction was in spite of the prevailing tight liquidity experienced in the financial markets.”
According to Olisaeloka, DMO was not comfortable selling above where it cleared the auction and market players wanted higher yields.
“The expectations are that yields should keep trending higher towards year-end, and when yields get to attractive levels, they will meet their demands for the bonds at the secondary market,” he said.
OLUWASEGUN OLAKOYENIKAN
