FGN Bond: Tight Monetary Policy Threatens FG’s N720bn Borrowing Plan
The Federal Government’s plan to borrow about N720 billion through FGN bond auctions in the third quarter, Q3’22, has come under fresh threat following increasing investors’ appetite for higher yields triggered by the adoption of tight monetary policy of the Central Bank of Nigeria (CBN).
Recall that the CBN, in response to the five consecutive months rise in inflation rate to 18.6 per cent in June, launched a tight monetary policy regime May, 2022, raising the Monetary Policy Rate, MPR, first by 150 basis points to 13 per cent in May and again by 100 basis points to 14 per cent in July.
This development effectively spurred increases in money market yields while intensifying investors’ appetite for higher returns across all instruments in all segments of the market.
Consequently, the first under-subscription was recorded in FGN bond auction this year, as the auction held in July recorded 37 per cent under subscription and as a result, Debt Management Office, DMO could not achieve its sales target.
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According to the FGN bond auction calendar for Q3’22 released by the Debt Management Office, DMO, the FG plans to raise between N630 billion and N720 billion during the quarter.
The calendar shows that the FG, through the DMO, seeks to raise between N210 billion and N240 billion in each of the three months in the quarter, through subscription in three tranches of 10-year, 10-year, and 20-year original tenor respectively.
But the N225 billion FGN bond offered by the DMO at the July auction recorded 37 per cent under subscription as total subscription stood at N142 billion.
Though the 20-year bond, 13.00% FGN JAN 2042, recorded 40 over subscription, as subscription stood at for N104.92 as against N75 billion offered by the DMO, the 3-years 13.53% FGN MAR 2025 and 10-years 12.50% FGN APR 2032, recorded 84 per cent and 66 per cent under subscription respectively, as subscriptions stood at N11.75 billion and N25.62 billion respectively as against N75 billion offered for each bon tenor.
Consequently, the DMO could only achieve total sales of N123.9 billion, representing 45 per cent of its target for the month.
This was in spite of slight increases in the interest rates on the bonds offered by the DMO.
The auction results showed that the DMO raised the marginal rates for the 3-year, 10-year and 20-year bonds to 11.0 per cent from 10 per cent, 13.0 per cent from 12.5 per cent and 13.7 per cent from 13.2 per cent respectively in the June auction.