The Debt Management Office (DMO) of Nigeria is set to auction government bonds worth a total of N450 billion on March 18, 2024, with the settlement for the bonds scheduled for March 20, 2024. The upcoming bond sale will consist of three distinct offerings aimed at both domestic and international investors.
The first offering includes a new 3-year bond worth N150 billion, maturing in March 2027. The second instrument is a 7-year reopening bond valued at N150 billion, which will mature in February 2031 and carry a coupon rate of 18.50%. The final offering is a 10-year reopening bond, also worth N150 billion, with a 19% coupon rate, due in February 2034.
The DMO’s offer document has highlighted the minimum subscription for the bonds at N50,001,000, with subsequent subscriptions in multiples of N1,000. Investors bidding for these bonds will pay a price corresponding to the yield-to-maturity rate that clears the auction volume, along with any accrued interest on the instrument.
In assessing the potential outcome of this auction, Meristem Securities has anticipated a continued rise in bond yields, which is likely to result in higher rates for the three bonds on offer. According to the firm’s analysis, the recent auction in February 2024, where the DMO introduced new bonds with tenors of February 2031 and February 2034, saw increased investor interest due to the larger offering size. Total subscription in that auction tripled, reaching N1.90 trillion, up from N604.56 billion in the previous auction held in January 2024.
Meristem Securities noted that while the bid-to-cover ratio fell to 1.27x from 1.45x in January (indicating that the allotment size was higher than the previous auction), the marginal rates for the February 2031 and February 2034 bonds were set at 18.50% and 19.00%, respectively. This trend indicates a growing demand for higher yields in the market.
Looking ahead to the March 18 auction, the firm expects the rates for the upcoming bonds to increase across all maturities, driven by the recent 400 basis point hike in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria. This move by the central bank has sparked expectations of a greater demand for higher rates from investors seeking to secure more attractive returns.
Meristem Securities has also provided insights on the fair values and implied yields for the bonds. For the FGN February 2031 bond, the fair value is estimated at N99.94, with an implied yield of 18.50%. They suggest that investors should place bids between 18.50% and 19.50%. Similarly, the FGN February 2034 bond is valued at N99.59, with an implied yield of 19.08%, with recommended bid rates ranging from 19% to 21%.
While no specific fair value has been provided for the March 2027 bond, Meristem recommends bidding within the 17.50% to 19% range for this instrument, based on the current market conditions.
A government bond, also known as a treasury bond, is a debt security issued by the government to raise funds. These bonds are typically considered low-risk investments because they are backed by the full faith and credit of the government. Bonds generally offer fixed interest payments, known as coupons, which are paid either semi-annually or annually. Government bonds can have maturities ranging from 1 year to 30 years or more, and they provide a reliable source of income for investors seeking stability and predictable returns. Treasury notes are bonds with a maturity period of 1 to 10 years, while treasury bonds extend beyond 10 years.
