On Monday, the Debt Management Office (DMO) conducted its December FGN bond auction in the primary market, with an offer of N225.0bn across three tenors, MAR 2029, APR 2032 and APR 2037. At the auction, investors demand came in strong with overall bids summing up to N532.2bn implying a bid-to-cover ratio of 2.4x. The DMO opted to oversell the auction by an allotment rate of 1.2x, selling N265.5bn worth of papers across the tenors on offer. Notably, investors interest was mainly skewed toward the 2037s, as it was oversubscribed by 5.0x.

In line with expectations in our weekly investment views for 12th – 16th December, marginal rates across all the offerings declined at the auction. This is attributable to the sustained improvement in investors’ demand in synchrony with available liquidity versus the supply of bonds for December. Aside from that, investors continue to opt for fixed income alternatives amid highest interest rate levels in more than a year as well as an unwillingness to take risks in the equity market as the year rounds up and elections approach. For context, marginal rates on the 2029s, 2032s, and 2037s declined c.15bps, 45bps, and 40bps, to print at 14.6%, 14.75% and 15.8% respectively.

Following the synchronised decline in stop rates at recent NT-bills and sovereign bond auctions, we expect bullish sentiments in the secondary bonds market to persist over the coming weeks as investors look to fulfill unmet bids. However, we turn attention to the outlook for the fixed income market over the next quarter. Our gauge of total sovereign maturities versus total supply of bonds/NT-bills indicates the next quarter will be flooded with liquidity. We estimate total sovereign maturities in Q1-2023 will print at N2.3tn while total auctions (bonds and NT-bills) will likely hover around N1.7tn, creating excess liquidity of N555.2bn. In addition, we anticipate inflation is near its peak and will begin to decelerate in coming months as base effect outweigh prevailing price pressures. As a result, the Monetary Policy Committee (MPC) is likely to put off or at least slowdown on rate hikes. Evaluating these factors indicate the yield curve is likely to record a downward parallel shift. Thus, we recommend mark-to-market portfolios can begin to increase their bond holdings while employing other active long bond trading strategies (such as buying duration risk).