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Prologue

The recent shift in the Debt Management Office’s (DMO) strategy, evidenced by the undersubscription of Nigerian Treasury Bills (NTBs) and reduced offers at the Federal Government of Nigeria (FGN) Bonds auction may signal a significant move in the government’s approach to managing public debt and capitalising on market conditions. The DMO also opened a $500 million dollar bond which is expected to close at the end of the month and is most likely the reason for the reduced appetite for Naira borrowing.

Towards the end of last week, rates stayed elevated albeit with a mixed tone, underscoring the complex relationship between geopolitical events and market dynamics. Oil prices remain especially sensitive to geopolitical developments, particularly those involving key regions like the Middle East, which plays a critical role in global oil production and supply. Beyond Middle-East tensions, indications by the Fed Chair that “…the time has come for Fed policy to adjust…,” also supported the bullish outlook for crude as lower interest rates could translate to improved consumption and ultimately more demand for crude.

The Naira traded as high as $/N1,606.00 at the NAFEM window on Friday and although liquidity was short at the beginning of the week, Friday opened with liquidity surplus of over N1.2 trillion. To the astonishment of many, the Central Bank took no action to drain liquidity.

Nigerian Financial Markets

Historically, the DMO’s primary role has been to raise funds for the Federal Government through the issuance of various debt instruments, including Treasury Bills and Bonds. This borrowing is crucial for financing government expenditure and managing fiscal deficits. However, the recent undersubscription of NTBs indicates a strategic adjustment by the DMO in response to evolving market conditions and liquidity dynamics. The DMO appears to have recalibrated its borrowing strategy, but instead of aggressively pursuing additional debt through NTBs, the DMO reduced its offerings at the FGN Bonds auction.

The DMO’s adjustment is also indicative of a broader understanding of market dynamics. In a high liquidity environment, where investors have a greater pool of available funds, the DMO might find it advantageous to issue fewer bonds to avoid oversupply and maintain favourable pricing conditions.

After rescheduling the FGN Bonds auction a week ago, the DMO conducted the auction for the month last Monday . Recall that the offer for the auction was reduced to a total of N190 billion from N300 billion. It is safe to say that the DMO is cutting down on borrowing after probably achieving its funding target. We saw the re-issue of the April 2029 (5-year), February 2031 (7-year) and May 2033 (9-year) tenors. The total amount of subscription was over N460 billion with over N374 billion allotted at the end of the auction. There was a significant shoot in the range of bids as it went as high as 30% across all tenors. The stop rates for the 5-year tenor closed at 20.30% (an increase of 41bps) and the 7-year tenor closed at 20.90% (a decrease of 10 bps). The 9-year tenor, similar to its position in June had a stop rate of 21.50% (a decrease of 48 bps from July’s auction).

The FGN Bonds auction result:

BONDS TENOR

APRIL 2029

FEBRUARY 2031

MAY 2033

AUCTION DATE

19-08-2024

19-08-2024

19-08-2024

SETTLEMENT DATE

21-08-2024

21-08-2024

21-08-2024

MATURITY DATE

17-04-2029

21-02-2031

15-05-2034

TENORS

5-YEAR

7-YEAR

10-YEAR

AMOUNT OFFERED (₦)

70 BILLION

70 BILLION

50 BILLION

SUBSCRIPTION (₦)

24.349 BILLION

60.750 BILLION

375.083 BILLION

AMOUNT ALLOTTED (₦)

18.349 BILLION

42.189 BILLION

314.218 BILLION

STOP RATES (%)

20.3000

20.9000

21.5000

PREVIOUS STOP RATES (%)

19.8900

21.0000

21.9800

Despite the FGN Bond auction held earlier in the week, liquidity remained long on Wednesday. Before now, the NTBs rates for the first two tenors had been on an upward trajectory, with the 91-day tenor climbing from an initial rate of 16.3% to a peak of 18.5%, and the 182-day tenor rising from 17.44% to 19.5% over a series of auctions, precisely, the last two (2) auctions. This consistent increase in rates might have been driven by a variety of factors, including inflationary pressures or the tightening of monetary policy. Investors typically demand higher returns to compensate for perceived risks or to keep the pace with rising inflation, which could explain the initial upward movement in these rates. In the just concluded auction, the 91-day and 182-day tenors closed at 18.2% and 19.2% – a decrease of 30 basis points respectively. The 364-day, however, closed at 20.9% from 21.89%, reflecting a decrease of 99 basis points. With a total amount of over N409 billion on offer, subscriptions soared as high as over N1 trillion across all tenors. Surprisingly, the DMO undersold securities by allotting only a little over N291 billion from the total amount subscribed.

NTBs Auction: 21st August, 2024:

AUCTION DATE

21-08-2024

21-08-2024

21-08-2024

ALLOTMENT DATE

22-08-2024

22-08-2024

22-08-2024

MATURITY DATE

21-11-2024

20-02-2025

21-08-2025

TENOR

91-DAY

182-DAY

364-DAY

OFFER (₦)

60,685,966,000

66,246,123,000

283,043,581,000

SUBSCRIPTION (₦)

61,137,783,000

55,522,493,000

909,451,075,000

ALLOTMENT (₦)

41,892,409,000

52,002,493,000

197,137,693,000

STOP RATES (%)

18.2000

19.2000

20.9000

PREVIOUS RATES (%)

18.5000

19.5000

21.8890

The CBN often adjusts its policies in response to economic indicators such as inflation rates or economic growth. However, the decline observed could reflect adjustments in expectations regarding future economic conditions. Where the market anticipates a stabilisation in inflation or a reduction in interest rates, investors might expect lower yields in the future and adjust their bids accordingly.

Market participants are of the opinion that we are potentially entering a bull market in anticipation of a rate reduction by the Central Bank of Nigeria (CBN) at the upcoming Monetary Policy Committee (MPC). However, it is crucial to recognise the concept of a ‘recall movement,’ or an initial reversal which often accompanies major market shifts. This is a brief period of price decline or consolidation that typically occurs after a significant upward trend.

To avoid being ensnared in a bull trap, investors should exercise a prudent and informed approach. This involves not only closely monitoring regulatory actions and economic indicators, but also maintaining a diversified investment portfolio to mitigate risks. It is crucial for investors to critically assess the sustainability of market trends and remain cautious of overly optimistic projections that may not align with broader economic realities.

What Lies Ahead

As the MPC prepares to meet in September, market participants are expected to closely monitor the decision and any forward guidance or commentary from the CBN. Such communications can influence investor sentiment and expectations, further shaping market trends. The interplay between anticipation and actual policy changes is critical at this time. We expect the markets to embrace the current bullish trend with cautious optimism.

The volatility in oil prices is a clear reflection of market uncertainty about the yet-to-be-concluded Gaza ceasefire deliberations, optimism about the Fed lowering interest rates and global growth concerns. In the absence of a ceasefire agreement, tensions are likely to remain high across the Middle East and consistent with this, crude prices should elevate further. Only supply boost shocks may reduce oil prices in the near term, but even this will not be sustained in the face of heightened conflict.

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