FG raises N289.597 billion in October bond auction at higher rates

The Federal Government has secured N289.597 billion from its October 2024 bond auction, according to the Debt Management Office (DMO).

This auction, held on October 21st, saw the reopening of two tranches of existing bonds: at 19.30% FGN APR 2029 (5-year bond) and at 18.50% FGN FEB 2031 (7-year bond) .

Despite the inflationary pressures facing the country, the auction attracted strong interest from investors, resulting in a higher placement.

Increased distribution reflects strong demand

The government initially offered N180 billion in the October auction, with N90 billion allocated to each bond. This was slightly lower than the N190 billion offered in September, which was spread across three bonds – the 5-year, 7-year and 9-year tenors.

Despite offering a lower amount, the total allotment for October rose to N289.597 billion, highlighting increased investor demand for government bonds.

The 5-year bond (APR 2029) attracted N60.737 billion in subscriptions, while the 7-year bond (FEB 2031) saw a significant jump in bids, totaling N328.584 billion.

There was a sharp increase in investor engagement, rising to N389.321 billion in October from the subscription of N293.097 billion recorded in September.

The high level of participation reflects investors’ sustained appetite for longer-term instruments, which offer better returns in a rising interest rate environment.

Of the total proposals received, N57.237 billion was allocated from the 5-year bond, while N232.360 billion was allocated from the 7-year bond.

The total allocation for October (N289.597 billion) represents a 9.5% increase over the N264.527 billion collected in September.

The allocation higher than that offered suggests that the government took advantage of the strong demand to meet its financing needs at the prevailing rates.

Marginal Rates Rise

The October auction saw a notable rise in marginal rates, reflecting investor expectations for higher yields in a context of inflation concerns and tighter monetary policies.

The 5-year bond was placed at a marginal rate of 20.75%, up from 19.00% in September, representing an increase of 9.2%.

Likewise, the 7-year bond saw its marginal rate rise to 21.74%, compared to 19.99% in the previous month, an increase of 8.8%.

The rise in rates points to the challenges faced by the government in managing borrowing costs, as investors demand higher compensation for their investments due to ongoing inflationary pressures and evolving fiscal dynamics.

What you should know

The outcome of the October auction highlights the complex environment in which the government is raising capital. On the one hand, the higher placement reflects the government’s ability to guarantee financing in a context of growing demand for its securities.

On the other hand, rising marginal rates indicate that borrowing costs are rising, potentially complicating future debt management strategies.

As inflationary pressures persist, the government will have to carefully balance its financing needs with market expectations.

The search for higher yields suggests that investors are betting on the risks of inflation and tighter monetary conditions.

This trend could influence the government’s debt strategy in the coming months, as it could face higher financing costs if market conditions remain unchanged.

The October auction settlement date is set for October 23, 2024. With borrowing costs rising, the government’s ability to maintain favorable terms for its debt issuance will be critical to ensuring sustainable financing.