The Federal Government raised over N346.155 billion in its November 2024 bond auction, reflecting higher allocations despite a reduction in the amount offered.

The auction, conducted by the Debt Management Office (DMO) on November 18, 2024, included the reopening of the 19.30% FGN APR 2029 (5-year Bond) and the 18.50% FGN FEB 2031 (7-year Bond ).

Compared to October, the November auction saw a 33.33% reduction in the total amount offered.

The DMO proposed N60 billion for each bond, down from October’s N90 billion. Despite the drop in bids, total allocations increased significantly, climbing by 19.50 per cent to N346.155 billion from N289.597 billion in October.

For the 5-year bond, N63.530 billion was allocated, while the 7-year bond recorded an allocation of N282.625 billion. On the other hand, the October auction allocated N57.237 billion and N232.360 billion to the 5-year and 7-year bonds respectively.

Total subscription levels

The total amount offered in the auction was N120 billion, distributed equally at N60 billion for each series of bonds.

• However, investor interest far exceeded expectations, with total offerings amounting to N369.585 billion, representing a subscription rate of 208%. This oversubscription highlights the market’s appetite for fixed income instruments in an evolving macroeconomic environment.
• Investor demand remained strong but moderated slightly with total subscriptions in November reaching N369.585 billion, a decline of 5.06 per cent from October’s N389.321 billion.

The 5-year bond attracted N75.560 billion in subscriptions, up from N60.737 billion in October. Conversely, 7-year bonds saw subscriptions fall to N294.025 billion from N328.584 billion.

Non-competitive allocation of N500 million

Nairametrics observed that during the November 2024 bond auction, the Federal Government also incorporated a non-competitive allocation, a feature generally designed to meet the needs of retail investors and small-scale participants seeking exposure to fixed income securities without competing directly on marginal rates.

• This allocation was applied exclusively to the 19.30% FGN APR 2029 (5-year Bond), with an allocation of 0.500 billion Naira.
• This relatively modest allocation represents a strategic inclusion, allowing for broader market participation while maintaining the auction’s primary focus on competitive bids from institutional investors.
• Noncompetitive allotments provide small investors with the opportunity to access government securities at the same marginal rate determined at the auction, without the need to submit competitive bids.

However, the February 2031 18.50% FGN issue (7-year bond) did not have any non-competitive allocations, indicating that OGD prioritized competitive bids for this longer-term instrument, probably due to the higher demand and substantial subscription it attracted. .

Marginal rates and bidding ranges

Marginal rates increased in November, reflecting tighter liquidity conditions. The marginal rate on 5-year bonds rose to 21.00% from 20.75% in October, while the rate on 7-year bonds increased to 22.00% from 21.74%.

Bid ranges in November also highlighted strong investor competition, with 5-year bonds receiving bids between 19.00% and 21.90%, and bids for 7-year bonds ranging from 18.00% to 21.90%. 00% to 23.00%.

The rise in marginal rates suggests a broader trend of upward pressures on borrowing costs, potentially influenced by inflationary trends and monetary policy adjustments.

What you need to know

The considerable interest in 7-year bonds relative to 5-year bonds reflects a preference for longer duration instruments, likely due to expectations of high and sustainable interest rates over the medium term.

• The sharp contrast between subscribed and allocated amounts indicates the DMO’s strategic allocation to balance the government’s financing needs with market stability.

• The reduced bid size in the November auction aligns with a possible strategy to manage borrowing levels while maintaining market confidence. Higher allocations, despite reduced supply, suggest an aggressive approach to securing funds for government projects amid rising borrowing costs.

The higher marginal rates and increased allocations highlight the government’s ability to attract significant investor interest despite market adjustments. However, the sustained rise in borrowing costs could impact fiscal dynamics, necessitating careful allocation of funds to critical sectors.

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