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Market | Bonds & Fixed Income

Ahead of FGN Bond Auction Scheduled for August 15th, 2022

Aug 14, 2022   •   by   •   Source: Meristem   •   eye-icon 349 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 15 th of August 2022. The total amount on offer is expected to be between NGN210bn and NGN240bn from three issues. The instruments include three re-opening issues (Mar 2025, Apr 2032, and Jan 2042). 

 

13.53% FGN MAR 2025 NGN70bn – NGN80bn 

12.50% FGN APR 2032 NGN70bn – NGN80bn 

13.00% FGN JAN 2042 NGN70bn – NGN80bn 

 

Current Yield Analysis 

At the last Primary Market Auction (PMA) held in July 2022, there was a significant decline in demand across instruments on offer, most notably the Apr 2032 instrument, (69.62% MoM). Overall, the total subscription at the auction plunged by 74.24% MoM to NGN142.29bn (vs. NGN552.36bn at the June PMA). Consequently, the total amount allotted was also lower by 45.23% MoM to NGN123.84bn (vs. NGN226.12bn at the previous auction). Accordingly, the bid-to-cover ratio tapered to 1.15x (vs. 2.44x in June). Consequently, due to the low demand, the marginal rates on the instruments increased to 11.00%, 13.00% and 13.75% (vs. 10.10%, 12.50% and 13.15% at the June auction).

 

In the coming auction, we anticipate an increase in rates across tenors. This is premised on the Government’s focus on domestic financing to fund its budget deficit and the spiraling inflation (which has kept real rate of return in the negative). Similarly, the increase in Monetary Policy Rate (MPR) by the Central Bank, as well as an expectation for further rate hikes makes a case for increase in rates at the PMA. We note that there was an increase in rate at the last Treasury Bills Primary Market Auction which attests to the demand for higher rates by investors. On the flip side, Central Bank’s Ways and Means of financing the Government could serve as a reason to keep rates low. 

 

In the secondary market, yields have maintained an upward trajectory since the last auction, with average bond yield as of 11th August increasing by 114bps to 12.62% from 11.48% at the last auction date. In the near term, we expect the bearish sentiment at the secondary market to persist hinged on the expectation of rates hike at the primary market auction.

 

Bond Absolute and Relative Valuation 

In valuing the 13.53% FGN MAR 2025, 12.50% FGN APR 2032 and 13.00% FGN JAN 2042 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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