Signs of renewed interest in DMO Auction

Last Wednesday, April 21st 2011, the Federal Government (FG) sold N35 billion in 3 year and 5 year bonds respectively at marginal rates of 12.14% and 13.19%, a 165bp and 120bp increases from the marginal rates at the last auction in March. Both issues were a reopening of previous issues and the original coupon rates of 10.50% and 4.0% for the 3 year and 5 year bonds respectively were maintained. Also, the Debt Management Office (DMO) reported a 26.4% increase in total subscription MoM to N129.22 billion compared to a decline of 26.9% in March. As I expected, Wednesday’s auction results reinforced the Q1’11 trend of narrower bid ranges and improving bid-to-cover ratios, signs of increase investor interest in the Nigerian debt market. However, I did not anticipated the extent of increase in marginal rates (165bp and 120bp for the 3yar and 5year respectively) as I anticipated significant foreign interest in the bond auction which should have cushioned the rate adjustment, in spite of the increase in inflation MoM to 12.8% from 11.1% in March.

I believe Wednesday’s auction was a barometer of sentiment towards naira assets in the aftermath of elections and note that its outcome was likely influenced by post-election violence which erupted in Northern Nigeria. Notably, total bids improved 3.9% MoM even as average bid range across both tenures decline 2.31% MoM on the back of improved activity. Furthermore, average bid-to-cover ratio across both tenures improved 14.2% MoM. While it is premature to view these improvement at Wednesday’s auction is a definitive trend, I believe it is a positive signal of investor interest particularly, when viewed in the context of recent gains in currency stability and the relative exemption of foreign investors to domestic inflation pressures. From this perspective, Nigeria’s attractiveness is directly tied to its relatively attractive yields. Likewise, stricter provisioning guidelines, cheap funding sources and continued risk aversion appear set to encourage continued participation by banks in the debt market. As such I still believe May’s auction will have provide investors the opportunity to fully digest the implications of post-election events possibly providing some upside for bonds as interest could drive bond yields lower though the inopportune post-election turbulence robbed this factor of some momentum.

Mandel Toyo