Market | Bonds & Fixed Income

Ahead of Next FGN Bond Auction Scheduled for March 20th, 2023

Mar 17, 2023   •   by   •   Source: Meristem   •   eye-icon 165 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, March 20, 2023. The total amount on offer is expected to be between NGN320bn and NGN400bn from four issues. The instruments include four reopening issues (FEB 2028, APR 2032, APR 2037, and APR 2049). 


13.98% FGN FEB 2028 NGN80bn – NGN100bn 

12.50% FGN APR 2032 NGN80bn – NGN100bn 

16.25% FGN APR 2037 NGN80bn – NGN100bn 

14.80% FGN APR 2049 NGN80bn – NGN100bn 


Current Yield Analysis 

At the last Primary Market Auction (PMA) held in February 2023, demand for the instruments on offer remained strong. While subscription on the Apr 2032 instrument was lower by 14.42% MoM, the total subscription at the auction was 23.34% MoM higher than the last auction (NGN993.11bn vs NGN805.17bn in January). The increase in subscriptions was majorly driven by robust system liquidity (c.NGN456.91bn as of the auction date). Equally, total allotment rose by 9.51% MoM to NGN770.56bn (vs NGN703.62bn in the previous auction). Consequently, the total bid-to-cover ratio was 1.29x (vs 1.14x in January). Nonetheless, the marginal rates of the 2037 and 2049 bonds increased by 10bps each to 15.90% and 16.00%, respectively, while that of 2032 remained flat at 14.90%. However, the marginal rate of 2028 declined marginally by 1bps to 13.99%. 


In the upcoming auction, we expect the marginal rates across tenors to hover around their current levels. This outlook is hinged on robust system liquidity -spurred by coupon payments (c. NGN185.82bn before the auction date) – expected to prompt higher investors' demand. However, we do not rule out a marginal uptick in the rates of longdated instruments owing to investors' expectation of Monetary Policy Rate hike at the Monetary Policy Committee meeting. 


The sentiment in the secondary market has increased negligibly since the previous primary market auction, as the average bond yield increased to 13.07% as of March 16 (1bps higher than the last auction date). In the near term, we expect the sentiment to persist as investors continue to trade sideways.


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 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037 and 14.80% FGN APR 2049 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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