Nigeria was unable to find enough buyers for its local bonds during an auction this week, the first time it has happened in seven months.
The Debt Management Office (DMO), the agency responsible for conducting bond sales for the government, was only able to raise N124 billion out of the N225 billion it intended to raise for the month of July.
Unlike the lone instance in April when the government received more bids than it offered but chose to sell less, there were simply less bids coming from investors in July.
Sales at the July auction came to only N124 billion as against the N225 billion that was offered. Investors bid a total of N160 billion, 30 percent less than the amount offered, according to data from the DMO.
The weak investor demand was despite higher returns on the bonds, even though they are still below inflation rate.
The marginal rates for the benchmarks set by the DMO were 11.0 percent for the three-year bond maturing in March 2025, 13.0 percent for the 10-year bond maturing April 2032 bond and 13.75 percent for the 20-year bond maturing in January 2042.
The rates represent between 50 basis points (bps) to 90bps above the marginal rates for the previous auction in June.
Investors have still piled into the local bonds this year despite returns below inflation.
The worry for some investors who spoke to BusinessDay is that the spread between returns and inflation is widening. Inflation printed at 18.6 percent in June, the highest in more than five years.
Yields have also moved up this year but not as fast as the inflation rate, leaving investors with a negative real return of between 5 to 8 percent.
Tight liquidity conditions also restrained appetite at the July auction. Investors simply did not have enough cash to buy the bonds.
Read also: Nigeria Eurobonds near junk, shut out of debt market
Analysts at Lagos-based investment bank, FBNQuest, say the tight liquidity conditions in the market may continue to negatively affect demand at auctions in the near term.
If demand for the local bonds continues to wane, the government could end up with less than it planned to raise from the domestic market.
The DMO has raised N1.96 trillion so far this year, which puts it ahead of the pro rata estimate for the period and 56 percent of the total N3.5 trillion earmarked for domestic borrowing for the full year.
But if the trend in July is sustained the government would be left with little options to cover its fiscal deficit for the year.
“The last resort would be for the fiscal deficit to become unfunded, or in other words, funded by ways and means advances from the CBN,” Tunde Abidoye, head of research at FBNQuest, said in a note to clients.
“Given the tight liquidity conditions in the market, we see yields inching up by around 25- 50bps across the curve over the coming weeks,” Abidoye and his team of analysts said.
Nigeria’s struggle to find buyers for local bonds is also coming at a time where rising global interest rates has dampened appetite for its dollar-denominated bonds.
The country’s Eurobonds have seen their prices collapse to a record-low with yields rising, a trend playing out across emerging and frontier markets.
