MARKET NEWS

The reopened February 2031 (seven-year) bond hit a record high 22 percent stop rate at the FGN bond auction on Monday.
This is a 26 basis-point increase from the 21.74 percent on the instrument at the last auction.

“DMO seems to have given the market an oxymoronic gift. Just when we are teetering on the edge of anticipated reduced issuance, the Feb 31s closes at record highs of 22 percent,” Atiku Audu, chief investment officer, ARM Pension Managers, said on a post on LinkedIn.

Similarly Ibrahim Tajudeen, director of research and strategy at Lagos-based investment bank Chapel Hill Denham, explained that the DMO compensated for the oversubscription on the instrument by raising rates. “ The instrument saw a bid of N294 billion despite the DMOs offering of N60 billion. So, there was a need to compensate for the demand,” he said.

DMO sold N 282.63 billion on its longest tenure Feb 31s (reopened seven-year bond), four times its offer in the November FGN bond auction on Monday.

Tajudeen explained that the increase in rate is also a reflection of the high inflation rate and the need of the DMO to inch closer to positive real returns.

“Altough, the real return is still negative, increasing the inches further narrows the gap,” he said. In October Nigeria’s headline inflation hit 33.88 percent, raising suspicions for a further rate hike later this month.

Audu said that the Feb 31st (seven-year bond) is now dangerously close to the N1.8 trillion issuance mark as it now sits at N1.795 trillion in total issuance.

The total outstanding value of the February 2031 instrument sits at N1.795 trillion at the 10th issuance of the instrument this year. The February 2031 instrument was first issued in February 2024 at a stop rate of 18.50 percent.

“In the entire history of the Nigerian bond market, no bond has ever crossed over 1.800 trillion in issuance. Even the Almighty Apr 2037s bond that was used for restructuring the debt of some states stopped at 1.797 trillion in total issuance,” Audu said. This month’s offer included a reopened N60 billion five-year and seven- year tenured bonds each. Audu projects that the Feb 31 (seven- year bond) might be excluded from further bond auctions due to this. “Very likely not to be on offer at the next or subsequent bond auction calendar. Reduced supply implies an opportunity for a good rally if it’s taken off,” he said.

The DMO sold a total of N346.16 billion FGN bonds, triple its total offer. The N120 billion FGN bonds offered across two tranches on Monday was the lowest auctioned this year, down from N180 billion offered in October.

In the last four months, the DMO has consistently decreased the size FGN bonds offers. Uduak Jacob, portfolio manager at Comercio Partners Asset Management, said that reducing the offer creates the impression of limited supply.

“Reviewing previous auctions since August 2024 reveals that the DMO has consistently sold well above the offer size seen in their circulars,” she said.

Jacob said that the high interest rate environment makes these bonds appealing to buy at their current levels. “Additionally, the reinvestment of FGN 2033 coupon proceeds may have contributed to the over subscription,” she said.

Fixed income yields have been rising steadily since the beginning of the year. The Monetary Policy Committee (MPC) has hiked the Monetary Policy Rate (MPR) by over 850 basis points in response to inflationary and FX pressures. These factors persist, supporting the need to maintain high interest rates to attract investors. The long-dated bond (reopened seven-year bond) was oversubscribed by nearly five times the N60 billion amount offered, selling N282.63 billion.

The high demand of this bond led to a drop in yield to 21.50 percent at Monday’s sales from 21.98 percent in the previous auction.

Samuel Gbadebo, fixed-income analyst at CardinalStone Limited, said that the reduced supply of notes to N190 billion from N300 billion last month indicates that the government is nearing its borrowing target for the year, hence giving the DMO more leeway to opt for more favorable rates as demand remains strong.

A similar trend occurred at the last auction where it sold double the N180 billion offered on its longest offer (nine-year bond). CardinalStone in its midyear outlook reported that fixed income yields are currently high and probably unsustainable and advised investors to invest in long dated instruments.

“A combination of these factors clearly favors a longer duration fixed income strategy and a careful watch on re-investment risks linked with currently attractive short-dated fixed income instruments, ” the report said. The DMO sold N63.53 billion worth of the Apr 21 (five-year) bond.

The stop rates of the five-year bonds also grew to 21.00 from reported at the last auction respectively, which is marginally less than the stop rate on the one year treasury bill considered less risky than longer-dated bonds.