Nigeria’s bond auction falls short as low interest rates deter investors
In a recent bond auction, Nigeria’s Debt Management Office (DMO) faced a lukewarm response from investors, managing to secure just about half of its target amount.
The office aimed to raise N2.5 trillion through the sale of seven and 10-year bonds but ended up with a subscription of N1.49 trillion.
Investors showed moderate interest in the seven-year bonds, subscribing to N873.5 billion, which is 69.6 percent of the intended amount.
The 10-year bonds were even less attractive, with only N621.38 billion subscribed, accounting for 49.6 percent of the offer.Financial analysts have pointed to the unappealing low-interest rates as the primary reason for the subdued investor appetite.
The stop rates for the seven and 10-year bonds were set at 18.5 and 19 percent, respectively. These rates are on par with the one-year Treasury bill, which is generally considered a safer option than the longer-dated bonds.
The bond stop rates are notably lower than the January inflation rate of 29.9 percent, as reported by the National Bureau of Statistics (NBS), making the bonds less attractive as an investment.
Portfolio managers have expressed their expectations for higher yields, similar to those seen in the Treasury bills auction, leading them to bid at rates above the stop rates for the bonds.
An economist at BancTrust & Co, Omobola Adu, remarked that the rate offered for the seven-year maturity did not generate significant interest from investors.
He also noted that investors are currently observing the Monetary Policy Committee’s (MPC) decisions and the potential future direction of interest rates before committing to longer-term investments.
Rising inflation is piling pressure on the CBN to hike rates at a meeting later this month.
The current benchmark interest rate stands at 18.5 percent with analysts expecting a 300 basis points hike by the CBN when the Monetary Policy Committee meets on February 26 and 27.
Sources familiar with this said that Tier one banks that were debited in excess of the 32.5 percent cash reserve ratio were refunded ahead of the auction
Banks are to have 32.5 percent of their deposit with the CBN, but during Emefiele’s tenure, there were arbitrary CRR debits, though Cardoso has tried to normalize with a bit of refund from time to time.
“He has also done some arbitrary debits in trying to manage the FX crises linking the excess liquidity in the bank to that, also having more funds to play in the currency market. So banks go debited more than the 32 percent to as much as 50 percent,” a source mentioned.
He said that two weeks ago Cardoso mentioned that they are going back to the 32.5 percent CRR so they’ll be refunding banks that have been debited in excess of that amount.
The N2.5 trillion bond auction is the highest amount the government has attempted to raise in local bonds in one month and is seven times more than the N360 billion offered in January.
At the previous bond auction, a total of N418.2 billion was sold of the N360 billion put up. The 15-year bond was oversubscribed to the tune of N266.7 billion, nearly threefold the N90 billion that was offered.
