Interconnected Realities: Bonds, State Debts & Global Economic Shifts

The recent auction result indicates strong investor demand for government bonds across all three (3) tenors. Despite offering ₦150 billion for each bond, the subscription exceeded expectations, indicating confidence in the bonds’ returns. While the 2027 FGN Bond is a new issue, the 2031 and 2034 FGN Bonds were re-opened in the just concluded auction. The stop rates were 19.9400% for the 3-year bond (27s), 20.0000% for the 7-year bond (31s), and 20.4500% for the 10-year bond (34s), indicating a slightly higher cost of borrowing for the Government. Compared to the original coupon rates, it is safe to say that it was a competitive bidding.

Looking closer at the results, a portion of the bonds were allotted through non-competitive bids, with ₦133.200 billion allotted for the 34s. This non-competitive allotment ensures broader participation in the auction, particularly for smaller investors who may not bid competitively, and promotes a more resilient and liquid bond market.

Recall that the previous bonds auction featured the new 7-year and 10-year tenors with a total offer of ₦2.5 trillion. The stop rates for the new 7-year and 10-year bonds marked the highest coupon level in the Nigerian bonds market. However, the subscription for both bonds fell short of the amount offered, indicating a slightly weaker demand than the previous auction, with stop rates of 18.5000% for the 31s and 19.0000% for the 2034s.

Overall, the amounts allotted were ₦151.928 billion for the 3-year bond, ₦47.886 billion for the 7-year bond, and ₦275.850 billion for the 10-year bond. It can be deduced that the allotments reflect favourable market conditions and investor appetite for government-backed securities.

Last Wednesday, Bloomberg reported that the DMO did a surprise Bond auction of a new 2-year bond, re-issued the 3-year Bond and a new 4-year Bond. In total, ₦2.36 trillion was issued at the auction. With no announcement to the Market of the auction, the nature of the auction has been speculated with some opinion that the auction was only open to Foreign Direct Investment prospects and some to Local Banks with maturing Dollar swaps with the CBN. Notwithstanding, the CBN was reported to have sold Dollars to Local Banks at a rate of ₦1,300.

The MPC is expected to hike rates at its meetings scheduled for today and Tuesday; with low liquidity in the money market, we expect rates at Wednesday’s T-Bills auction to be higher than those at the last auction. With the CBN’s continued battle to tackle the dollar rates, the only questions in the minds of market participants are “How high fixed income rates can go?” and “How strong can the naira be?”

Recently, the Federal Government disclosed that the country’s 36 states, along with the Federal Capital Territory, collectively owe a sum of ₦1.72 trillion in budget support facilities. This was revealed during a presentation at the National Economic Council (NEC) meeting chaired by Vice President Kashim Shettima. The Federal Government had previously provided a Bridge Financing Facility of ₦656 billion to assist the states in meeting their financial obligations. However, the outstanding debt remains a concern, with each state bearing a burden of ₦49.11 billion. Additionally, the meeting discussed updates on various economic matters, including crude oil theft prevention and control, with other areas of deliberation expected in subsequent sessions.