The prevailing fiscal constraint has continued to mount pressure on the Federal Government to borrow at higher costs. Against the backdrop of persistent rise in inflation (20.77% as at September), hawkish monetary policy stance of the Central Bank (MPR at 15.5%), and worsened debt service to revenue ratio (118%), investors are aggressively seeking adequate compensation that will largely shrink the existing negative real return in the fixed income market. Investors’ bargaining power seems to have been enhanced considering the current contraction in funds supply driven largely by the decrease in foreign capital inflows. As at August 2022, the total portfolio inflows year-to-date stood at N301.37bn which constituted only 15.97% of total transaction value (N1,887.20bn ytd). 

Meanwhile, the Federal Government Revenue as at April 2022 stood at N1.63trn, amounting to an annualised (full year estimate) of N4.89trn against the revised expenditure budget of N17.31trn. Apparently, the budgeted deficit of N7.35trn was underestimated and may potentially hit N12.42trn particularly with the heavily challenged crude oil production (0.972mbpd in August). Hence, the Federal Government has been in a dilemma with regards to financing the prevailing budget deficit. 

Based on data published by the Debt Management Office on the FGN bonds auctioned on October 17, 2022, the 12.50% FGN APR 2032 bid ranged between 14.20% - 18.50% which confirms investors’ expectations of higher yield. Also, out of N75bn offered, total subscription stood at N15.6bn while N11.9bn was allotted at 15% marginal (stop) rate (higher than September auction rate of 13.8490% and August 13.5%). Similarly, the marginal rate for 16.2499% FGN APR 2037 increased from 14.5% in September to 16% in October. Same trend was witnessed in the recent Treasury Bills auctions. Data from the Central Bank of Nigeria showed that the CBN offered N151.06bn in 364Day T.Bills but was only able to sell N30.76bn out of a total subscription of N107.67bn. We note that the bid ranged between 6.9950% - 17.00% while the marginal rate closed at 13% from 12% at the previous auction. We expect fixed income yields to continue to trend northward against the backdrop of the aforementioned factors which we think will continue to impact negatively on the fundamentals of the Nigerian fixed income instruments, particularly the government securities.