Against the background of the recent slump in demand for Federal Government bonds, analysts at FBNQuest have warned that the development suggests that investors may be showing signs of fatigue, adding that this would damage the economy if it persists.
In a note obtained by New Telegraph, the analysts cited last fortnight’s significant drop in demand for bonds auctioned proby the Debt Management Office (DMO), stressing that if this continued it would increase government’s dependence on external financing of the budget deficit.
The analysts stated: “The DMO sought to raise N95billion from its most recent monthly auction of FGN bonds yet registered sales of just N39billion. Monthly sales are generally steady and the rare dips can be explained by the DMO’s determination to halt upward pressure on yields by setting marginal rates that reject the majority of bids.
“In November, however, the total bid slumped to N62billion, the lowest since January 2012 when our records begin.
Given the FGN’s sizeable borrowing requirement this year and next, a continuation of this trend would be highly damaging.”
The analysts further stated that the bonds slump would increase government’s dependence on external financing of the budget deficit, adding that: “We favour such financing but it comes neither easily nor rapidly, which is evident from the delay in launching the sovereign Eurobond and securing the World Bank funding.”
They, however, pointed out that that the recent sharp drop in demand for Federal Government bonds was probably because the auction was held before the latest monthly release of Federation Accounts Allocation Committee (FAAC) monies.
Commenting on Pension Fund Administrators’ (PFA) low bid of at the last auction, the analysts stated that they hoped that it was “a one-off ’’, noting that data from the National Pension Commission (PENCOM) shows that 59per cent of the PFAs’ Asset Under Management (AUM) at the end of September 2016 was invested in FGN bonds.
“These holdings of N3.50trillion represented 47per cent of the stock of bonds at end-June,” the analysts stated.
It will be recalled that at the DMO’s last auction, the government sold far fewer bonds than it offered as investors demanded higher yields. Specifically, auction results showed that investors were demanding yields as high as 18 per cent for the notes, way above the mid-point at which the DMO wanted to issue them.
One trader was quoted by Reuters at the time to have said that: “The thinking in the market was that the bonds are not rightly priced now considering the level at which treasury bills are trading, hence the lack of interest to buy at the present yield level.”