DMO Raises N2.2trn as FG Front Load Borrowings

Debt Management Office (DMO) has raised N2.2 trillion year to date, a total sum that is more than 91% of its domestic borrowings target in the first half of 2023 amidst a plan to finance Nigeria’s budget deficit via the local debt market.

Daily Global News reported that Nigeria’s debt office held its monthly FGN Bonds auction where it offered N360 billion worth of securities for subscriptions at the local debt capital market earlier in April 2023.

According to auction results, the debt agency raised N368.7 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 13.00% FGN JAN 2042, and 12.98% FGN MAR 2050 FGN bonds.

Amidst tight liquidity in the system, a slew of fixed income analysts reported that demand was tepid. Demand at the auction declined by 82.1% to N444.0 billion compared with N808.4 billion recorded in the previous month, according to Coronation Research.

The bids for the 5-year FGN Bonds, 9-Year FGN Bonds, 15–year FGN bonds, and 27-year FGN bonds were allotted with mixed spot rates.

FGN Bonds maturing in 2028 spot rate settle at 14.00%. FGN Bonds maturing in 2032 were sold at 14.80%, a decline in the spot price from 15.20%. FGN bonds maturing in 2042 were allotted at a spot rate of 15.40%, and FGN 2050 debt instrument was sold at a spot price of 15.80%.

Bid-to-cover stood at 1.2x compared with 1.4x recorded in the March auction, Coronation Research said, noting that demand at this auction primarily reflects tight system liquidity.

Analysts noted that market liquidity stood at a deficit of -N203.2 million on Friday as outflows from, OMO and NTB auctions outweighed coupon maturities. Tightening in liquidity level has pushed short-term benchmark rates to double-digit highs.

Both repo and overnight lending are already approaching 20% after a sustained deficit widened by local banks’ demand for liquidity.

According to Coronation Research, the CBN’s discretionary cash reserves (CRR) debits on local banks for failing to meet a 65% loan-to-deposit ratio contributed to tight system liquidity resulting in further upticks in the interbank market rates.

Call, overnight and repo rates closed within a range of 6 – 19% on Friday last week, contributing to softer demand at the auction, according to analysts’ notes. `

“.. We recall that the CBN’s circular dated 07 October 2022, prohibits participants with successful bids at FGN bond auctions from accessing the CBN’s discount window for short-term loans on the settlement day.

“Failure to comply would attract a penal charge of 5% on the allotment value. This directive has also contributed to reduced demand at the auction. As expected, domestic institutions were the core participants at the auction as foreign portfolio investors remain on the sideline”, the firm added,.

The latest monthly National Pension Commission report shows that as of end-February 2023, FGN bonds held by pension fund administrators (PFAs) had increased by 18.5% to N9.6 trillion and accounted for 61.7% of total assets under management.

Negative real interest rates on the back of persistent upticks in headline inflation reading of 22.04% have also contributed to the apathy of foreign portfolio investors towards FGN bonds, Coronation Research said.

In the second quarter of 2023, analysts indicate that they expect a small improvement in system liquidity, largely on the back of an FGN bond maturity, Nigerian T-Bills and OMO maturities as well as bond coupon payments.

“These maturities and coupon payments collectively amount to N1.6 trillion. We expect a slight moderation in the average yield of fixed-income instruments, even as the FGN continues to front load domestic borrowing”.

The DMO had set out to raise a maximum of N2.4 trillion in the first half of 2023 through FGN bonds. However, it has raised N2.2 trillion, representing 91.6% of its target from the beginning of the year to date. #DMO Raises N2.2trn as FG Front Load Borrowings