Yesterday, the Debt Management Office (DMO) conducted its September FGN bond auction in the primary market, the last auction for Q3-2022, offering N225.0bn across three (3) tenors, the MAR 2025 (three-year bond), APR 2032 (10-year bond) and APR 2037 (15-year bond). Overall, investor demand was relaxed, majorly skewed toward the tail-end of the curve, with submitted bids amounting to N246.4bn, oversubscribed with an overall bid-to-cover ratio of 1.1x. The 2025s and 2032s remained undersubscribed by 0.6x and 0.8x. On the other hand, the newly issued 2037s (coupon rate: 16.25%) attracted significant interest from investors, with an oversubscribed rate of 1.9x. Interestingly, the DMO oversold the auction, allotting a total of N229.2bn vs 225.0bn on offer.
In line with the overall market expectation of a continued uptick in the yield environment of the sovereign bonds market, marginal rates across the 2025s, 2032s, and 2037s climbed 100bps, 35bps, and 50bps, to print at 13.50%, 13.85%, and 14.50%, respectively. We observed improved sentiment from investors, which was primarily driven by the newly issued 2037s with an attractive coupon of 16.25%. At the auction, Non-competitive bids to the tune of N32.3bn were received by the DMO for the 2032s, representing a significant 56.7% of total subscriptions for the 2032s.
Looking ahead to subsequent auctions, we expect the outcome of the MPC meeting scheduled to hold on the 26th and 27th of September to set the tone for the continued uptick in the bond yield environment going forward. We maintain that rising inflationary pressure (reflected in August’s Inflation number which printed at 20.52% y/y vs 19.64% in July), and hawkish indicators from central banks of advanced economies, remain bold signals for a possible rate hike by the MPC. Also, reduced maturities and coupon inflows in the coming months, coupled with rising political risks and the electioneering season as we approach the end of the year, will further support the uptick in rates. The FG’s persistent need to rely on the domestic market to fund its fiscal imbalance will continue to shove pricing power away from the FGN/DMO and into the hands of the private sector asset managers, thus driving higher rates.