Following two consecutive months of abysmal subscription levels in the Federal Government of Nigeria (FGN) Savings Bonds on the back of reduced interest rates, the government has raised, for the first time in 4 months, its proposed rates for September 2019 Savings Bonds.
This is in a move to boost retail participation at the Savings Bonds auction and to replicate elevated yields on short-tenured benchmark FGN Bonds and the Nigerian Treasury Bills in the secondary fixed- income market.
“When the treasury yield curve is being elevated, the DMO would have to adjust to be within market reality,” Nnamdi Olisaeloka, fixed income analyst at Lagos-based Zedcrest Capital Limited, said in a telephone interview.
In a notice released by the Debt Management Office (DMO) on Monday, the FGN said it commenced an auction for the subscription of a two-year and three-year savings bonds for the month with interest rates at 11.15 percent and 12.15 percent per annum, respectively.
These rates correspondingly compare with 10.301 percent and 11.301 percent offered on the bond instruments in the previous month, and indicate the debt agency’s first rate hike on the securities since May 2019.
“What we do with those bonds is pricing,” Patience Oniha, Director-General of DMO, had said while explaining the rationale behind the rate hike in an exclusive chat with BusinessDay in May. “We look at what our benchmark bonds are trading at FMDQ, and we apply that, so that’s essentially the basis for the increases.”
Checks by BusinessDay reveal that allotments to successful bidders across the two-year and three-year tenors plunged by more than a quarter to N78.72 billion and N198.96 billion in July 2019 and rose marginally to N81.03 billion and N243.37 billion in August 2019, respectively.
The average yield on short-dated benchmark bonds closed at 14.24 percent at the last trading session in August, while the average discount rate on benchmark Nigerian Treasury Bills stood at 12.96 percent.
With the increased rates, though lower when compared with those at the secondary market, the DMO could attract more retail investors at the auction owing to the accessibility of the instruments.
FGN Savings Bonds are fixed-income instruments tailored to retail investors and issued monthly to deepen the savings and investment opportunities. The bond is also targeted to enhance financial inclusion in the country as income earned from it is exempted from taxes. With the FGN Savings Bond, low-income earners can save and earn more interests than regular bank savings.
The two-year tenor would be due on September 11, 2021, while the three-year savings bond would mature on September 11, 2022, according to the DMO. Interested investors are expected to bid for the instruments at the auction, which commenced on Monday, September 2 and expected to end on Friday, September 6, with a settlement date of September 11, 2019.
The bonds are offered at N1,000 per unit subject to a minimum subscription of N5,000 and in multiples of N1,000 thereafter, subject to a maximum subscription of N50 million.
The state-owned debt agency assured that the bonds are backed by the full faith and credit of the Federal Government of Nigeria and charged upon the general assets of the country, implying there is no risk of default.
Furthermore, the debt office guaranteed a bullet repayment of the principal on the maturity date with quarterly interest payment dates of December 11, March 11, June 11, and September 11.
Bondholders can use their investment as collaterals to obtain loans, while those who do not wish to hold on to the securities till the maturity date could trade their investment at the secondary market such as the Nigerian Stock Exchange and the FMDQ Securities Exchange.
OLUWASEGUN OLAKOYENIKAN
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