April 2022 Bond Auction Postscript

A weak auction, DMO contains upside via non-competitive bids

At its monthly bond auction yesterday, the Debt Management Office (DMO) sold NGN349billion worth of bonds relative to an initial target of NGN225billion. Demand was weak with a bid-cover ratio at a four-month low of 1.82x (March: 3.99x), which provides some hint that much of the liquidity deluge that supported prior auctions in Q1 2022 has now largely dissipated. As such the DMO relied on non-competitive bids of NGN129billion (37% of its allotment and 57% of its planned offer) to clear the auction in a bid to contain yield upside. Average stop rates closed higher at 11.8% (March: 11.43%).

In terms of bid dynamics, the weighted average bid yield across the three tenors stood at 9.71%, 12.18% and 13.08% for the 2025s, 2032s and 2042s respectively. This compares to secondary market trading levels of 9.2% and 12.91% for the on-the-run 2025s and 2042s and market expectations (using a select poll of bank views) at 12.21% for the 2032s. As such, the DMO positioning appeared higher across the 2025s and 2032s but neutral relative to the 2042s. The main interpretation to glean from here is that the DMO was trying to contain market expectations for higher yields in view of its large borrowing requirement.

Figure 1: Annual non-competitive bids

Source: DMO 2022 is Jan-Apr

So where do we go from here? A random slow walk upwards

Relative to the 2022 initial budget which called for domestic borrowings of NGN2.57trillion (or implied gross borrowings of around NGN3.2trillion), the DMO is about 39% of target with YTD bond sales of NGN1.23trillion. However, there is a supplementary budget making its way through the national assembly to fund a fuel subsidy bill of NGN4.4trillion which calls for borrowings of approximately NGN1trillion. Running the numbers, I estimate that the DMO would have to sell NGN2.9trillion in domestic borrowings which translates to NGN350-360billion in monthly bond sales. An unsurprising number given the NGN349billion sold in April!

Figure 2: FGN Primary and Secondary Bond Yields

Source: DMO, Bloomberg

In terms of yield outlook, the sense you get is that in the absence of any liquidity tightening activity by the CBN, market reaction to increased bond supply from the DMO is a gradual upward progression akin to a stairways up (vs. elevator style) increase in bond yields. In the near term, market movements will likely be dominated by buying sentiments around the incoming FAAC inflows, end of month coupon inflows and the Eurobond issuance sentiment under an atmosphere of CBN remaining accommodative (i.e. muted CRR debits).

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