The Debt Management Office (DMO) has announced the results of the August 2023 FGN bond auction.
According to information seen on DMO website, the auction featured the re-opening of four bonds: the 14.55% FGN APR 2029 (10-Year Bond), 14.70% FGN JUN 2033 (10-Year Bond), 15.45% FGN JUN 2038 (15-Year Bond), and 15.70% FGN JUN 2053 (30-Year Bond).
The auction, which was held on 14th of August 2023, saw a total of 281 bids worth N312 billion received for the total amount offered of N360 billion.
The total amount allotted was N277.76 billion, with successful bids allotted at marginal rates of 13.85%, 15.00%, 15.20% and 15.85% respectively across the four bonds.
The settlement date for the auction is 16th August, 2023, and the bonds will mature on April 26, 2029, June 21st, 2033, June 21st, 2038, and June 21st, 2053 respectively.
Rising Inflation
The data from the August 2023 FGN Bond shows an under subscription of -13% which indicates lower demand for risk-free investments as Investors are weighing in on the impact of rising inflation.
Nigeria’s inflation surged to 24.08% in the month of July 2023, a 129 basis-point increase compared to 22.79% recorded in the previous month.
The significant jump is following the complete removal of petrol subsidies and the unification/devaluation of the official exchange rate.
Notably, on a month-on-month basis, the headline inflation rate stood at 2.89% in July which was 0.76% higher than the rate recorded in June 2023 (2.13%).
What the data is saying
The fact that the highest subscription of ₦244.231 billion (more than double the offer) went to the 30-year bond indicates that investors are interested in longer-term debt with higher yields.
But compared to July auction where there was oversubscription of more than 1000% on 30-year bond, it shows that Investors are weighing in the impact of rising inflation.
Nevertheless, the allotment of ₦244.231 billion to the 30-year bond also shows that investors are still interested in long-term debt with 15.85% returns.
The 30-year bond is the longest tenor on offer and has a relatively high yield, which is attractive to investors seeking to invest their money for a longer period and earn higher returns on their investments.
What is a reopened bond?
A reopened bond is a type of bond that has been previously issued but is now being offered for sale again. When a bond is first issued, it is known as a new issue or an original issue.
Once the bond has been sold and is outstanding, it can be reopened for additional sales in the future.
Reopened bonds have the same coupon rate, maturity date, and other features as the original bond, but they are sold at a different price and yield, which may be higher or lower than the original issue price and yield.
Reopened bonds are often used by governments and corporations to raise additional funds without incurring the costs of issuing a completely new bond.
Investors who purchase reopened bonds receive the same cash flows and credit risk exposure as those who purchased the original issue.
Investors in bonds has had it rough due to incremental inflation. Inflation and inflationary pressure moves in opposite direction to bond prices. Rising inflation and interest rate hikes means lower bond prices.
But banks makes so much money when interest rates are hiked to check inflationary pressure in the economy.
Government should introduce windfall taxes on hiked interest rate income by lenders to ensure income redistribution in the economy.