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Market | Bonds & Fixed Income

Ahead of Next FGN Bond Auction Scheduled for November 14th, 2022

Nov 13, 2022   •   by   •   Source: Meristem   •   eye-icon 270 views

Issue on Offer/Summary 

The Federal Government of Nigeria (FGN), through the Debt Management Office (DMO), will be conducting a bond auction on Monday, November 14th 2022. The total amount on offer is expected to be between NGN210bn and NGN240bn from three issues. The instruments include three re-opening issues (APR 2029, APR 2032, and APR 2037). 

 

14.55% FGN APR 2029                 NGN70bn – NGN80bn 

12.50% FGN APR 2032                 NGN70bn – NGN80bn 

16.25% FGN APR 2037                 NGN70bn – NGN80bn 

 

Current Yield Analysis 

At the last Primary Market Auction (PMA) held in October, demand for the instruments on offer declined significantly relative to the auction held in September. The total subscription at the auction dropped by 51.64% MoM to NGN119.18bn (vs. NGN246.44bn at the September PMA). The low subscription rate impacted the total amount allotted, which plunged by 52.93% MoM to NGN107.88bn (vs. NGN229.20bn at the previous auction). We attribute the reduction in subscription levels to the tighter financial conditions spurred by the aggressive hawkish Monetary Policy stance. 

 

The recent hiking of key policy rate and Cash Reserve Ratio to 15.50% and 32.50%, respectively, mopped up system liquidity as the interbank treasury rate increased by 514bps to 12.21% between 27th September (MPC decision date) and October PMA. Despite the decline in subscription and allotment, the bid-to-cover ratio improved to 1.10x (vs 1.08x in September), attributable to the substantial drop in the amount allotted. Cumulatively, marginal rates on the APR 2032 and APR 2037 increased by 115bps and 150bps to 15.00% and 16.00%, respectively. 

 

In the coming auction, we anticipate a marginal increase in rates across tenors. This is based on investors' demand for higher rates to compensate for the persistent increase in inflation (20.77% YoY in September - the highest in over a decade), which has impacted real return. Also, the expectation of a further hike in the monetary policy rate (MPR) could influence investors' decisions to demand more advanced rates. Overall, we expect investors' participation at the auction to remain minimal. 

 

The sentiment in the secondary market has been largely bearish since the previous primary market auction, with an average bond yield of 14.44% as of November 10th (69bps higher than the last auction date). We expect the bearish sentiment at the secondary market to persist in the near term, owing to the tighter system liquidity and the increase in the rate at the primary market auction.

 

Please see the table below for our recommended bid rates based on our analysis of the current yield environment. 

 

Bond Absolute and Relative Valuation 

In valuing the 14.55% FGN APR 2029, 12.50% FGN APR 2032 and 16.25% FGN APR 2037 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 factor into our valuation, on which we advise bid yield ranges for both issues on offer.

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