FG to issue about N240bn worth of bonds today

THE Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Monday, April 25, 2022.

The total amount on offer is expected to be between N210 billion and N240 billion from three issues which include two reopening issues (Mar 2025 and Jan 2042) and a new issue (Apr 2032).

According to Meristem Research, there would be 13.53 per cent FGN March 2025 N70 billion to N80 billion, FGN April 2032 N70 billion -N80 billion as well as 13.00 per cent FGN January  2042 N70 billion -N80 billion worth of bonds.

The research firm, in a note to clients, stated, “In valuing the 13.53 per cent FGN March 2025, FGN April 2032 and 13.00 per cent FGN January 2042 offers with the current yield curve as the basis for discounting, we arrived at the following fair value, implied yield and advised bid rates for the instruments:

“Our valuation gives a fair-trading price ex coupon payment, the expected return on the bond considering its periodic interest payments and the expected return on the bond’s periodic payments.

“We analysed the issues on offer given the current yield environment, market liquidity, as well as a review of the recent past auctions, whilst also introducing market sentiment factors into our valuation, on which we advise bid yield ranges for both issues on offer.”

According to Meristem Research, at the last Primary Market Auction (PMA) held in March 2022, demand for the instruments on offer remained strong as witnessed in the previous auctions during the quarter.

While the subscription for the January 2026 instrument was lower by 29.00 per cent, the total subscription at the auction was 7.30 per cent higher than the prior auction (N598.42 billionn vs N557.72 billion in February).

The increased demand was however met with a marginally lower allotment compared to the February auction (the amount allotted was N296.37 billion vs N297.39 billion in February).

Therefore, there was a marginal decline in rates on both instruments to 10.15 per cent and 12.70 per cent, respectively (vs. 10.95 per cent and 13.00 per cent in February).

A major cause of the robust demand for treasury instruments in first quarter (Q1): 2022 was the high system liquidity.

This constrained investors’ bargaining power at the primary market auctions, resulting in a decline in rates. With lower system liquidity in the second quarter and the continued uptrend in inflation, “We note the likelihood of investors demanding for higher rates. Thus, we expect a marginal increase in rates on the reopened instruments. We expect these factors to also influence the rate on the newly issued instrument,” it stated.

In the secondary market, bond yields have trended upwards since the last primary market auction, with average bond yield at 9.68 per cent as of tApril 14 (499bps above what it was as at the last auction).

With lower system liquidity and likelihood of increased rates at primary market auctions, dealers expect the bearish sentiment in the secondary market to persist over the near term.