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

This auction, which was held on October 21, included two reopened tranches of existing bonds: the 19.30% FGN APR 2029 bond (5-year bond) and the 18.50% FGN FEB 2031 bond. (7-year bond).

Despite the inflationary pressures facing the country, the auction attracted strong investor interest, resulting in a higher allocation.

Increase in allocations reflects strong demand

The government initially offered N180 billion in the October auction, with N90 billion allocated to each bond. This amount was slightly lower than the N190 billion offered in September, which was divided into three bonds: 5 years, 7 years and 9 years.

Despite a lower amount, the total allocation for October jumped to N289.597 billion, highlighting increased investor demand for government securities.

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

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

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

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

The total allocation for October (N289.597 billion) represents an increase of 9.5% from the N264.527 billion raised in September.

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

Marginal rates are climbing

The October auctions saw a notable rise in marginal rates, reflecting investors’ expectations for higher yields amid inflation concerns and tighter monetary policies.

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

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

The rate hike highlights the difficulties faced by the government in managing borrowing costs, as investors demand higher remuneration for their investments due to persistent inflationary pressures and changing fiscal dynamics.

What you need to know

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

On the other hand, rising marginal rates indicate that borrowing costs are increasing, which could complicate 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 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 could face higher borrowing costs if market conditions remain unchanged.

The settlement date for the October auction is 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.

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