Debt Management Office (DMO) sold a total of N374.75 billion FGN bonds, double its offer as investors continued to lock in for long dated bonds against projected dip in rates .
It sold five times its offer on its longest tenure (reopened nine-year bond) in August FGN bond auction on Monday.
The N190 billion FGN bonds offered across three tranches on Monday, is the lowest auctioned this year down from N3oo billion offered last month.
“The reduced offer size signaled a possible reduction in government borrowing, since yields are quite elevated, maybe highest in a while, investors rushed to lock in those yields is why there is so much interest at the auction,” Victor Ogundijo, a fixed-income analyst said.
This month’s offer included a reopened N50 billion nine-year bond, and N70 billion five and seven- year tenured bonds each .
Another analyst Matilda Adefalujo, fixed-income analyst with Meristem, explained that the DMO has been trying to reduce rates so as to reduce borrowing cost through different strategies.
“They wanted the subscriptions to be high so they offered a very low amount (N190 billion)so they could get high demand and hence reduce rates,” she said.
This explains why the long dated bond (reopened nine-year bond) was oversubscribed by more than seven times the amount offered, selling N314.2 billion, five times the N50 billion offered.
The high demand of this bond led to a drop in yield to 21.50 percent at Monday’s sales from 21.98 percent in the previous auction.
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Samuel Gbadebo, Fixed-income analyst CardinalStone Limited said that following the reduced supply of notes to N190 billion from N300 billion last month, this indicates that the government is nearing its borrowing target for the year, hence giving the DMO more leeway to opt for more favorable rates as demand remains strong.
“Hence, the expectation of lower auction rates has resulted in market participants locking in rates at current levels as subsequent auctions may see even lower rates,” Gbadebo said.
Similar trend occurred at the last auction where it sold double the N100 billion offered on its longest offer (nine-year bond).
A Lagos based fixed-income analyst said that the reason why the 9-year was heavily subscribed is because it is the longest-dated bond at the auction and most clients, particularly the Pension Fund Administrators will subscribe to it because of its duration.
“ Also, it is quite liquid in the secondary market and the most sought-after bond. compared to other bonds, it is easy to buy and sell in the secondary market,”
“Short-sellers will want to cover their positions. Assume one-third of the subscriptions were from short-sellers trying to buy to close their short positions at 21.98 percent,” the sources said.
CardinalStone in its midyear outlook reported that fixed income yields are currently high and probably unsustainable and advised investors to invest in long dated instruments.
“A combination of these factors clearly favors a longer duration fixed income strategy and a careful watch on re-investment risks linked with currently attractive short-dated fixed income instruments, ” the report said.
The five- year tranche was undersubscribed, only about 26 percent of the N70 billion offered was sold, which was N18.35 billion. Yields on this bond i ncreased to 20.30 percent from 19.89 percent at the previous auction.
Similarly the seven year bond was also met with lower than offered demand of N60.75 billion of which only N42.19 billion was sold. It yield decreased to 20.90 percent from 21 percent
The stop rates of the five and seven-year bonds also grew to 19.89 and 21.00 from 19.64 and 20.19 percent reported at the last auction respectively. Which is marginally less than the stop rate on the one year Treasury bill considered less risky than longer-dated bonds.
