Interest Rate: Investors’ FGN Bonds Subscription Hits N6.05tn in Nine Months

Kayode Tokede  

As investors scramble for fixed income securities as a result of attractive interest rates, the total subscription for FGN bonds increased to N6.05 trillion in nine months of 2024.

THISDAY analysis of the latest auction by the Debt Management Office (DMO) revealed that investors were offered N5.3 trillion in the period under review but the DMO allotted N4.99 trillion.

Since the beginning of 2024, THISDAY gathered that investors have shown interest in the long-term FGN Bond, a major factor contributing to the amount raised in the period.

The nine 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 between January and September 2024 has continually re-open some FGN Bonds and steadily hike its interest rate to attract investors amid double-digit inflation rate.

THISDAY also gathered that DMO in February 2024 recorded the highest amount offered, about N2.5 trillion but settled for N1.49trillion with a subscription level at N1.9 trillion.

With the budget deficit in the 2024 budget put at N9.18 trillion, the FG seems committed to borrowing more from the domestic market.

However, the latest auction for September 2024, showed that DMO on behalf of the FG raised N264.527 billion, about 29 per cent decline when compared to N374.751 billion in August 2024.

The auction result revealed that, DMO reopened three tranches of FGN bonds: the 19.30% FGN APR 2029 (5-year bond), the 18.50% FGN FEB 2031 (7-year bond), and the 19.89% FGN MAY 2033 (9-year bond).

In the month under review, DMO offered N150 billion to investors and it recorded a subscription of about N414.881 billion.

The auction result of DMO had revealed that in August 2024, the debt office offered the same bond tenors and amounts, but total subscriptions were higher at N460.182 billion.

The N414.881 billion subscription in September 2024, represents a 9.8per cent decrease in total subscriptions month-on-month, with the largest decline in the 9-year 19.89% FGN MAY 2033 bond, which saw subscriptions drop from N460.182 billion in August 2024.

Despite the lower allotment in September, the results indicate sustained demand, particularly for longer-dated instruments.

In this auction, N70 billion was offered for both the 5-year and 7-year bonds, while N50 billion was offered for the 9-year bond.

The 19.89% FGN MAY 2033 bond attracted the highest subscription, with bids totaling N337.347 billion against the N50 billion offer. Out of these bids, N230.716 billion was allotted at a marginal rate of 20.05%.

The 18.50% FGN FEB 2031 bond garnered N54.979 billion in subscriptions, with N31.079 billion allotted at a marginal rate of 19.99%.

On the shorter end of the spectrum, the 19.30% FGN APR 2029 bond saw bids worth N22.555 billion, with N2.732 billion allotted at a marginal rate of 19.00%.

In the September bond auction, the marginal rates across all bond tenors were lower compared to the previous month’s rates. For the 5-year bond (19.30% FGN APR 2029), the marginal rate in August was 20.30%, while in September it dropped to 19.00%. This represents a 6.40% decrease in the marginal rate from August to September.

Similarly, the 7-year bond (18.50% FGN FEB 2031) saw its marginal rate decrease from 20.90per cent in August to 19.99per cent in September 2024.

This translates to a 4.35per cent decrease in the marginal rate, again indicating a more favorable borrowing condition for the government as investors were willing to accept a lower return compared to the previous month.

The largest rate reduction occurred in the 9-year bond (19.89% FGN MAY 2033), where the marginal rate fell from 21.50% in August to 20.05% in September. This marks a 6.74% decrease in the rate.

The reduction in the rate suggests that the government was able to secure funding for this tenor at a slightly lower cost, which could help reduce debt servicing obligations.

Meanwhile, analysts stated that 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 Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf had stated that the FG 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.”

“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.

“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.”