Pressure mounts on FG treasury as DMO over sells October bond auction

As funding pressures on the fiscal coffers of the Federal Government (FG) continues, and in line with the trend observed at recent auctions, the Debt Management Office (DMO) has sold N192.8billion worth of bonds against the N150.0billion offered.

Information obtained from the debt office revealed that the DMO conducted the October bond auction, offering to sell N150.0billion worth of bonds across the 2026s, 2037s and 2050s.

Analysts United Capital Research explains that this clearly reflects the funding pressures on the fiscal coffers of the Federal Government (FG). According to the analysts, despite the issuance of Eurobonds, the underperformance of revenue FG’s at 67.8 per cent as of Aug-2021and unrelenting expenditure needs which has already attained 94.0per cent performance as of Aug-2021) continues to widen FG’s deficit. As a result, there is a continuing over-reliance on the domestic debt market for funding needs.

The auction according to United Capital Research was met with decent investors’ interest as the 2026s, 2037s and 2050s recorded bid-to-cover ratios of 0.9x, 1.6x and 2.4x, respectively. “Overall, the auction received a total bid of N250.7billion, implying a bid-to-cover ratio of 1.7x.

“That said, we note that bid levels at the auction continue to follow the weakening trend observed at the September bond auction,” the firm observed in a note to clients.

To give perspective, the bid-to-cover ratio of 1.7x in October’s bond auction pales in comparison to the last three bond auctions (Jul – 1.9x, Aug – 2.4x, Sept – 2.2x), it further stated.”

We think this corroborates the evidence of weak liquidity in the bonds market while investors remain passive in the face of aggressive government debt capital raise. Overall, marginal rates at the October auction closed northwards with the rates closing at 11.65 per cent (previously 11.60%), 12.95per cent (previously 12.75%), and 13.20per cent (previously 13.00%) on the 2026s, 2037s and 2050s, respectively.

“Looking ahead, we expect sentiments in the bonds market to remain bearish as the secondary markets reprice bonds to auction levels. “In addition, we anticipate short-sellers would begin to trade in the market which would further push yields higher in the near term.

“Also, we note that short and mid-tenor bonds in the secondary market are trading at a premium, relative to auction pricing,” according to analysts from United Capital.

The 2026s and 2037s closed trading (as of 20th October) at 10.90 per cent and 12.89per cent, compared to 11.65per cent and 12.95per cent at the recent auction. The firm further observed that these bonds could see increased short selling activities in the near term, driving yields higher.