Wednesday, May 18, 2022 /10:23 AM / by United Capital Research / Header Image Credit: BusinessDay

On Monday, May 16th, 2022, the Debt Management Office (DMO) conducted Its May FGN bond Auction with the following instruments on offer; MAR 2025, APR 2032 and FGN JAN 2042. At the auction, investor demand was relatively healthy as 2025, 2032, and 2042 instruments were oversubscribed with bid-to-cover ratios of 1.68x, 1.53x and 4.46x, respectively. Bids were significantly higher than in the previous auction, with bid-cover ratios of 1.5x, 1.0x and 3.0x, across the three tenors. 

The marginal rates on the 2042s crawled northwards, inching upwards by 10bps to print at 13.00%. The 2025s maintained its marginal rate to print at 10.00%, while the marginal rate for the 2032 instrument declined by 5bps to print at 12.45% compared to its previous rate of 12.50%. This decline resulted from the financial repressive tactics of the Sovereign Debt office to maintain yields across the curve. The DMO oversold by 68.00% allocating N378.41bn against the N225bn on offer 33.15bn (8.76%) of the total sales were to non-competitive bidders, which signals an attempt to curb the pace of reversal in yields, as selling to only competitive bidders would have seen the marginal rates close lower. 

In line with our projections of an upward reversal of rates through Q2-22, which was based on reduced system liquidity, we expect a further uptick in rates at June's auction. The FGNs sustained reliance on debt funding will also remain a key driver. We expect investors to continue to price in the sustained reversal in bond yields in the secondary market. As a result, we recommend active short-selling trade activities from investors while wary of long positions.