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At domestic debt auction, investors strong on longer tenor papers

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On Monday, the Debt Management Office (DMO) conducted its April FGN bond auction in the primary market, offering N360.0 billion across four (4) tenors: FEB 2028, APR 2032, JAN 2042, and MAR 2050.

At the auction, investors’ demand came in strong despite the financial system closing in a deficit of 262.3bn, with overall bids summing up to N442.0 billion, implying a bid-to-cover ratio of 1.2x.

The DMO opted to oversell the auction marginally by 2.1 percent, selling N367.6 billion worth of papers across the tenors on offer.

Notably, investors’ interest was mainly skewed toward longer tenors, as the bulk of investors bid to the tune of 95.7 percent (N423.0 billion) of total bids for the 2042s and 2050s.

Interestingly, marginal rates of the 2028s and 2032s were unchanged, printing at 14.0 percent, while the 2032s rose by 5 bps to 14.8 percent; the papers were severely undersubscribed with bid-to-covers of 0.2x and 0.1x, respectively.

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The newly re-issued 2042s and 2050s captured investor interest, having bid-to-covers of 1.1x and 3.6x, respectively, while their marginal rates settled at 15.4 percent and 15.8 percent, respectively.

Looking ahead to subsequent auctions, we expect that in Q2-2023, the amount of liquidity in the financial system will make investors less aggressive with their bids.

However, the outcome of the MPC meeting scheduled to hold on the 22nd and 23rd of May is to set the tone for the continued uptick in the bond yield environment at the end of H1-2023.

We maintain that rising inflationary pressure (reflected in the March inflation number, which printed at 22.04 percent y/y vs. 21.9 percent in February) and hawkish indicators from advanced economies’ central banks remain bold signals for a possible rate hike by the MPC.

Also, reduced maturities and coupon inflows in H2-2023, coupled with rising political risks as we approach the end of the year, will further support the uptick in rates.

The FG’s persistent need to rely on the domestic market to fund its fiscal imbalance will continue to shove pricing power away from the FGN/DMO and into the hands of private sector asset managers, thus driving higher rates.

(United Capital Plc)

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