Investor Demand Weakens at June FGN Bond Auction, Raising Only N297 Billion


Higher-yield-seeking investors continued to stay on the sidelines during the recent Federal Government of Nigeria (FGN) bond auction, resulting in lower subscription levels for the third month in a row. The Debt Management Office (DMO) raised only N297 billion through its June bond auction as investor demand for FGN bonds remains subdued.

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The DMO auctioned N450 billion worth of FGN bonds across three tranches on Monday, June 24, including a reopened nine-year bond and bonds with five-year and seven-year tenures, each valued at N150 billion. This total falls short of the N378 billion raised from the N450 billion offered at the previous auction.

“Based on market trends and economic fundamentals, the economy needs higher interest rates. Yesterday’s auction results, which showed low subscription despite coupon payments on Friday and relatively high system liquidity, indicate weak investor appetite for Nigerian bonds,” said Ike Alabi, a fixed income research analyst at Afrinvest West Africa.

“The low allotment is due to the low subscription,” Alabi added, noting that this has forced those still interested in acquiring bonds to bid at higher rates. She observed that the Federal Government is trying to reduce its debt, although recent auctions have seen subdued rates. “There was low subscription yesterday, and those that bid did so at higher yields, but investors are seeking even higher returns.”

At the June bond auction, the long-dated nine-year bond saw greater interest, selling N229.498 billion, 50 percent higher than offered, with an oversubscription of N229.549 billion at a stop rate of 21.50 percent. The stop rates for the five and seven-year bonds were 19.64 percent and 20.19 percent, respectively, higher than the previous auction’s rates of 19.29 percent and 19.74 percent. These rates remain below Nigeria’s June inflation rate of 33.95 percent, highlighting ongoing price pressures.

The benchmark interest rate currently stands at 26.25 percent, up 750 basis points from 18.75 percent at the start of the year. Nigeria’s bond sales have been declining since April’s N626.6 billion auction, which was higher than March’s N475.7 billion. February saw a record-breaking auction of N2.5 trillion, with N1.5 trillion sold, while January sales reached N523 billion.

“Looking forward, we expect the bonds market to remain quiet, with lackluster interest from investors given that most market participants view that rates in fixed-income markets have peaked,” analysts at United Capital said in a recent note. They also observed a relatively quiet secondary market for bonds, with average yields on sovereign bonds inching up slightly.

“Bearish sentiment dominated the secondary market for bonds last week,” noted the Guy Czartoryski-led team at Coronation Asset Management. In the FGN bond market, average yields saw a minor rise, driven by sell-offs in long-dated bonds. Yields at the short-end and mid-point of the curve saw slight declines, while long-end yields increased.

Segun Adams, a fixed income analyst at Afrinvest West Africa, had projected smaller allotments at future auctions as the DMO attempts to manage fiscal pressures. “A trend we should expect for the near term,” he said.

The DMO reported last week that Nigeria’s total public debt stock hit N121.67 trillion in March, a 25 percent increase from N97.34 trillion at the end of December 2023, representing a N24.33 trillion increase within three months. At Monday’s auction, only N22.13 billion and N45.38 billion were sold from the five-year and seven-year tranches, respectively, due to low subscriptions.

Analysts at CardinalStone noted that the government’s decision to frontload a substantial part of its 2024 borrowings in the first quarter meant subsequent auctions would see smaller volumes. The Q2 2024 bond auction calendar suggests that the government will raise between N300 billion to N600 billion monthly, compared to the N2.5 trillion raised in Q1 2024.

Vetiva analysts observed that sell-side action dominated the short end of the curve, with yields on the March-2025, January-2026, and February-2028 bonds rising. They anticipate investors will remain on the sidelines in anticipation of higher yields.

Bisi Adele, The Naija247news
Bisi Adele, The Naija247news
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