The Federal Government secured N289.597 billion from its October 2024 bond auction, according to the Debt Management Office (DMO).
This auction, held on October 21, featured two re-opened tranches of existing bonds: the 19.30% FGN APR 2029 (5-year bond) and the 18.50% FGN FEB 2031 (7-year bond).
Despite the inflationary pressures facing the country, the auction attracted robust investor interest, resulting in a higher allotment.
Increased allotment 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 distributed across three bonds—the 5-year, 7-year, and 9-year tenors.
Despite offering a lower amount, the total allotment for October surged to N289.597 billion, highlighting heightened investor demand for government securities.
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, totalling N328.584 billion.
There was a sharp increase in investor engagement, rising to N389.321 billion in October from the N293.097 billion subscription recorded in September.
The high level of participation reflects investors’ sustained appetite for longer-dated instruments, which offer better returns in a rising interest rate environment.
Out of the total bids received, N57.237 billion was allotted from the 5-year bond, while N232.360 billion was allocated from the 7-year bond.
The total allotment for October (N289.597 billion) represents a 9.5% increase from the N264.527 billion raised in September.
The larger-than-offered allotment suggests that the government took advantage of the strong demand to meet its financing needs at prevailing rates.
Marginal rates climb
The October auction witnessed a notable increase in marginal rates, reflecting investors’ expectations for higher yields amid inflation concerns and tighter monetary policies.
The 5-year bond was allotted at a 20.75% marginal rate, up from 19.00% in September, representing a 9.2% increase.
Similarly, the 7-year bond saw its marginal rate rise to 21.74% from 19.99% in the previous month, an 8.8% increase.
The increase 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 one hand, the higher allotment reflects the government’s ability to secure financing amid rising demand for its securities.
On the other hand, the increase in marginal rates indicates that borrowing costs are escalating, potentially complicating future debt management strategies.
As inflationary pressures persist, the government will need to carefully balance its financing needs with market expectations.
The demand for higher yields suggests that investors are pricing in inflation risks and tighter monetary conditions.
This trend could influence the government’s debt strategy in the coming months, as it may face higher borrowing costs if market conditions remain unchanged.
The settlement date for the October auction is set for October 23, 2024. With borrowing costs rising, the government’s ability to maintain favourable terms for its debt issuance will be critical in ensuring sustainable financing.