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Sunday, July 3, 2022
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Bond Auction: Nigeria still depends on CBN overdraft for funding ~ Analysts

“Interestingly, the DMO sold the sum of N226.1 billion, N1.1 billion higher than it intended to offer, representing a significant deviation from its usual practice of “significant overselling” at the auction (the May auction was oversold by 68 per cent).”

On Monday, the Debt Management Office (DMO) conducted Its June FGN bond Auction, the last auction for Q2-2022 with N75 billion on offer for each of the following instruments; MAR 2025 (three-year bond), APR 2032 (10-year bond) and JAN 2042 (20-year bond).

At the auction, investor demand was relatively healthy as 2025, 2032, and 2042 instruments were oversubscribed with bid-to-cover ratios of 1.8x, 1.1x and 4.5x, respectively.

Due to sparse financial system liquidity, bids were relatively lower than in the previous auction, with bids declining 4 per cent, 34.5 per cent and 0.1 per cent for the 2025s, 2032s and 2042s respectively.

In line with our expectations, the marginal rates inched northwards for all the auction papers, crawling upwards by 10bps, 5bps, and 15bps to print at 10.10 per cent, 12.50 per cent and 13.15 per cent for the 2025s, 2032s and 2042s respectively.

Despite the increase in the marginal rates for the auction, we consider the magnitude of the increase inadequate and below expectations.

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For context, the 15bps increase in the 2042 marginal rate represents one-tenth of the recent hike in the Monetary Policy Rate (MPR), amidst limited inflows at the long end of the curve.

Interestingly, the DMO sold the sum of N226.1 billion, N1.1 billion higher than it intended to offer, representing a significant deviation from its usual practice of “significant overselling” at the auction (the May auction was oversold by 68 per cent).

We consider this surprising given the FG’s apparent need to rely on the domestic debt market to fund its obligations as external debt market conditions remain unfavourable.

For us, we believe it’s a sign that the FG may still have access to sustained financing via CBN’s overdrafts.

In the immediate term, we expect the current calm in the secondary market to persist, with demand mainly skewed to the short end of the curve, which seems to have drawn more appetite from investors in recent weeks.

We recommend this strategy in bid to reduce duration risk as yield curve movements remain broadly uncertain.

~United Capital Plc

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