Nigeria plans N2 trillion bond sale on 16 November after October yields rose

About N10.85 trillion of securities mature in November, N8.927 trillion of them central bank securities and N1.919 trillion Treasury bills, according to Financial Markets Dealers Association data. That is more than five times the N2 trillion the Debt Management Office proposes to offer on 16 November. Analysts say the maturing paper could boost demand at the auction and potentially lower borrowing costs.

David Precious, senior market analyst at EBC Financial Group, said the choice investors make with maturing cash decides the outcome. "When short-term securities mature, investors receive cash and choose between another short-term security and a bond," he said. "A bond locks the money in for several years, so investors need a return that makes that worthwhile. If enough of the cash comes to the bond sale, buyers compete for the same bonds, and the government may be able to raise the N2 trillion at a lower return."

Some November repayments may land after settlement of the 16 November auction, which would limit the cash available to reinvest.

October's auction: more supply, thinner cover

FGN bond allotments rose 25.70% to N2.010 trillion in October from N1.599 trillion in September, the only one of the three instruments to increase, according to the FMDA's October market report. That total includes N800 billion of non-competitive allotments, down from N850 billion in September, Cowry Asset said. At the 19 October auction the DMO allotted about N1.2 trillion through competitive bids, up from N748.64 billion in September. The bid-to-cover ratio on FGN bonds fell to 1.00 times from 1.49 times, meaning bids only matched the amount offered.

The DMO offered about N1.8 trillion across the February 2034, September 2036 and June 2038 bonds, up from N1 trillion in September, Cowry Asset said. Subscriptions rose to N1.7 trillion from N1.5 trillion, so the bid-to-offer ratio slipped to 1.0 times from 1.5 times.

What the government is paying

The February 2034 bond cleared at 16.99%, up from 15.50% at its previous issuance. The September 2036 bond rose 50 basis points to 17.29% from 16.79%, and the June 2038 bond rose 34 basis points to 17.19%.

Cowry Asset said the repricing showed the DMO had to offer more competitive yields to attract funds amid rising supply. The firm told investors the larger issuance volume carries a cost:

"While we think this approach supports the government's domestic borrowing programme, the increased volume of issuance also raises the potential for sustained upward pressure on borrowing costs as investors reassess the returns required to absorb additional government debt."

Why yields rose despite the cash

Investors kept demanding higher returns because the policy rate stands at 23%, after the CBN cut it by 350 basis points on 22 September, and September inflation was 14.63%, down from 15.39% in August. That leaves the policy rate well above inflation, so long-term bonds must compete with short-dated paper that pays more.

Nigeria's 10-year yield rose 40 basis points to 16.63% in October, while the US 10-year fell 36 basis points to 4.93% and Japan's fell 30 basis points. South Africa's yield declined 23 basis points, the UK's 14 and China's six, while Kenya's rose 13 to 12.53%. Nigeria's spread over the US 10-year stood at about 11.70 percentage points. The FMDA attributed the domestic move to softer auction demand rather than a monetary policy adjustment. Average Treasury bill yields rose 28 basis points to 18.02%.

Total October auction allotments across NTBs, OMO bills and FGN bonds fell 55.86% to N9.501 trillion from N21.527 trillion in September, driven by a 64.69% drop in OMO issuance to N6.182 trillion. The NTB bid-to-cover ratio fell to 2.19 times from 5.11 times and the OMO ratio to 1.70 times from 3.69 times. The CBN ended October a net liquidity injector of about N2.87 trillion, after a net withdrawal of about N6.62 trillion in September, because OMO maturities of N9.051 trillion exceeded the N6.182 trillion it allotted.

The CBN stepped up OMO sales again in early November, allotting about N2.95 trillion at a 3 November auction, nearly half of October's total in a single sale, against a N1.5 trillion offer and at stop rates of 17.67% to 17.77%, Nairametrics reported. A return to aggressive OMO issuance would absorb much of the November inflow, the FMDA said.

What happens next

The DMO's provisional fourth-quarter calendar provides for N2 trillion of bond offers on each of 16 November and 14 December, after the N1.75 trillion offered in October. The calendar is provisional, so the final amount raised could differ from the N2 trillion target.

N7.15 trillion of FGN bonds were allotted in January to September, more than double the N3.48 trillion a year earlier, according to CSL Research. CSL Research said the additional supply could limit further declines in yields.

The 16 November auction will show whether maturing cash reaches the bond market or is absorbed by the CBN, and the rate accepted will set the government's interest bill for the life of the bonds. The next Monetary Policy Committee meeting is scheduled for 23 and 24 November.