Kayode Tokede
In a bid to bridge the 2024 budget deficit, the federal government through the Debt Management Office (DMO) has raised a sum of N4.35 trillion from the Bond market.
The federal government has been successful in the bond because of attractive yield and investors' appetite for long-term investment.
Analysis of trading activity sowed that while the debt office offered to raise N4.96 trillion in the period under review, total subscription stood at N5.18 trillion.
Last month, the Director General of DMO, Ms. Patience Oniha disclosed that the federal government had raised N4.5 trillion out of the N6 trillion target in the 2024 budget.
She noted that domestic securities remain a major source of federal government spending.
She stated, "Last year, we raised N7 trillion as new domestic borrowing. It speaks to the size of the domestic market, its resilience, and its sophistication, unlike we have in many African markets."
"Out of the new domestic borrowing of six trillion Naira, we have raised N4.5 trillion. For the Ways and Means, out of N7 trillion approved for securitisation, we have raised N4.905 trillion."
Since the beginning of the year, investors have shown interest in the long-term FGN Bond, a major factor contributing to the amount raised in the period.
The seven months auction by DMO revealed a shift in investor preferences towards higher-yielding and longer-tenor bonds, amidst a backdrop of cautious market sentiment.
The DMO has since January 2024 continually re-open some FGN Bonds and steadily hike its interest rate to attract investors amid inflation rate.
The FGN bond market this year consistently witnessed increased participation by Pension Funds Administrators (PFAs) as double-digit inflation rate eroded investment in money and capital market instruments.
Consequently, the pension funds industry portfolio in the FGN Bonds increased to N12.08 trillion as of May 2024, a report by the National Pension Commission (NAICOM) revealed.
In the latest auction for July 2024, the DMO disclosed that it raised N225.714 billion for the federal government, which is about 75 per cent of its target as demand for short-term bonds weakens.
In June 2024, about N297.006 billion was raised from the June bond auction, which means that the amount raised this month has dropped slightly by 24 per cent.
While the FG offered a total of N300 billion across the three different bond tenors in the latest auction, total subscription for the July 2024 FGN bond auction amounted to N279.664 billion, which is an under subscription of N20.336 billion.
Amid the under subscription, the total amount allotted to successful bids in the auction was N225.714 billion, which is slightly less than the total subscription.
The auction results, released by the DMO, reveal strong investor interest in longer-term securities while demonstrating a noticeable reluctance towards shorter-term bonds.
The auction featured three re-openings of Federal Government of Nigeria (FGN) bonds: the 5-year, 19.30% FGN APR 2029; the 7-year, 18.50% FGN FEB 2031; and the 9-year, 19.89% FGN MAY 2033. The total bids received for these bonds amounted to 186, highlighting a moderate level of participation and competitive interest.
The 19.30% FGN APR 2029 bond, a re-opening of the 5-year bond, saw a modest level of investor interest. The Federal Government offered N100 billion worth of these bonds, and received a total of 21 bids. Out of these, 11 bids were successful, culminating in a subscription amount of N21.485 billion.
Amid the low subscription, the government allotted N18.885 billion of the bonds. The range of bids for this bond varied from 18.5000% to 21.0000%, with the marginal rate being set at 19.8900%.
The 18.50% FGN FEB 2031 bond, which is a re-opening of the 7-year bond, experienced even lower investor interest compared to the 5-year bond. With N100 billion on offer, the total number of bids received was 16. Out of these, only 9 bids were successful, resulting in a subscription of N16.530 billion.
The government allotted N6.180 billion worth of the bonds from this subscription. The range of bids for the 7-year bond was between 16.0000% and 20.5900%, with a marginal rate of 21.0000%.
In stark contrast to the shorter-term bonds, the 19.89% FGN MAY 2033 bond, a re-opening of the 9-year bond, attracted substantial investor interest. The amount offered was the same N100 billion, but the bond received a remarkable 149 bids. Out of these, 117 bids were successful, leading to a massive subscription of N241.649 billion.
The government eventually allotted N200.649 billion, far exceeding the amounts allotted for the 5-year and 7-year bonds. The bids for the 9-year bond ranged from 17.5000% to 23.0000%, with the marginal rate set at 21.9800%. The significant oversubscription and high allotment underscore a strong investor preference for longer-term securities, likely driven by the higher returns and perceived stability over the extended period.
The July 2024 bond auction results reflect a notable trend in market sentiment, with investors displaying a marked preference for high-yield, longer-tenor bonds.
This trend aligns with the broader economic environment, where investors are looking for stable and attractive returns in government securities.
Analysts attributed the strong demand for FGN bond to attractive yield, which offers investors high returns on their investments, stressing that the oversubscriptions also revealed that investors have confidence in the federal government's ability to meet its debt obligations.
"The appetite for FGN bonds indicates that PFAs, and Nigerian investors prefer investment instruments with less volatility that assures them of their capital returns albeit with low yield on investment.
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"But some analysts attributed the under subscription to some issuances to fear of interest rate risk, "as investors are full well informed that economy is still very much challenged and that inflationary pressure remains unabated.
"So, investors expect higher yield for this particular issuance, while the government does not wish to borrow at higher interest rate," said CEO, Wyoming Capital and Partners, Mr. Tajudeen Olayinka.
Meanwhile, in recent years, Nigeria's rising debt profile has been a topic of concern, as Vice President, Highcap Securities Limited, Mr. David Adnori, warned that the country's debt levels are unsustainable.
According to Adnori, "Ways and means" refer to the CBN's lending to the federal government. The DMO said that the "securitization of ways and means" is not unusual and is a common practice in many countries, but it is not a decision that can be made by the DMO alone."
Adnori expressed concerns that Nigeria's rising debt levels could become unsustainable if not managed properly.
The Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf recently stated that the federal government notified the general public of borrowing more in 2024.
He said, "With all the volatility and foreign exchange issues, it makes sense to borrow at the domestic market rather than borrowing from the international market. It is all a reflection of our macro economy environment challenges and weak fiscal policy of the government. All this borrowing also is a reflection of the weak financial position of the government and it will continue like that."
