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BusinessDay

DMO bond auction demand falls amid settlement concerns

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The Debt Management Office’s (DMO) N90 billion, 3 and 20-year note auction held yesterday, attracted little demand from investors, as the debt sale was hampered by concerns about the CBNs new bond settlement system and investors expectations of higher yields in the future .

The debt sale was affected by structural issues, said a bond trader who spoke to BusinessDay after the auction.

“Some counterparties won’t buy until all outstanding settlement issues are resolved,” said the bond trader, who asked not to be identified.

“Some investors are also saying why buy now, when yields will rise later.”

The CBN has been struggling in its efforts to run its new depository the S-4 (Scripless Securities Settlement System), which has caused serious settlement problems for market operators and investors since its inception in early December 2013.

The range of bids by banks and investors at the auction indicated that investors sought to optimise returns by submitting relatively high bids, above the DMO cut-off point, said another bond dealer.

The DMO had planned to issue a total of N90 billion yesterday, made of N45 billion in 3-year, 13.05 percent notes due August 2016 and N45 billion in 20-year, 10.00 percent notes due July 2030.

In the December 2013 bond auction, successful bids for the 13.05 percent FGN AUG 2016 and 10.00 percent FGN JUL 2030 were all allotted at the marginal rates of 12.9 percent and 13.20 percent, respectively, according to data from the DMO.

However yields on the benchmark 2016 and 2030 notes have climbed since then and were offered at 13.18 percent and 13.30 percent respectively, according to yesterday’s prices from the Financial Markets Dealers Quotations (FMDQ) website.

The inflation rate for December also increased for a second month, rising by 10 basis points to 8 percent from 7.9 percent in November, according to data from the National Bureau of Statistics (NBS).

Demand for FGN bonds at current yields may have slackened amid expectations of higher issuance volumes this year from market participants.

“The uncertain political outlook, investor concerns about the transition at the CBN and a likely leg of pre-electoral fiscal expansion, as well as higher bond issuance volumes from next year, will not be conducive for further yield compression at the long end,” Standard Bank analysts, led by Samir Gadio, an emerging markets strategist, said in a note released Dec. 16.

BusinessDay was unable to ascertain the actual bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, as data collation from the auction was still ongoing.

Lower demand from investors for government paper would be a concern for the FG, as it goes into an election year needing to finance the N912 billion budget short-fall projected for 2014.

Nigeria’s total domestic debt stood at N7.03 trillion ($45.1 billion) at the end of September 2013, while offshore investors held approximately $5.4 billion in Nigerian bonds, as of September 30 ,2013 up from $1.2 billion  at the end of September 2012, according to a November 25 Reuter’s report.

The CBN’s S-4 system failed between Monday 16th and Tuesday 24th Dec. 2013, prompting a halt of settlements for Treasury -bill transactions in that time period.

Money market stakeholders say the CBN is going against global best practices, and ignoring the conflict of interest that arises from its assumption of the role of a securities depository for fixed income securities it issues.

By: PATRICK ATUANYA