Low liquidity in the system, occasioned by the Central Bank of Nigeria (CBN)’s use of Cash Reserve Ratio (CRR) debits was responsible for the relatively low demand at the bond auction held by the Debt Management Office (DMO) on Monday, analysts at Coronation Merchant Bank Economic Research, have said.
The analysts, who stated this in the “Coronation Economic Note” released yesterday also attributed the low demand at the bond auction to “investors’ apathy towards the current level of FGN bond yields.” According to the analysts, the domestic fixed income market is currently dominated by local investors and real interest rates have remained negative amid rising inflation.
The analysts stated: “The DMO held its monthly auction of FGN bonds on Monday. It offered N225 billion but raised N123.9 billion ($288.7 million) through re-openings of the 2025, 2032 and 2042 FGN bonds. Demand was considerably lower, as the DMO secured a total bid of N142.3 billion ($331.6 million). The bids for the 3, 10 and 20-year benchmarks were allotted at the marginal rates of 11.0 per cent (previously; 10.1 per cent), 13.0 per cent (previously; 12.5 per cent) and 13.7 per cent (previously; 13.2 per cent) respectively. “The DMO has a domestic funding target of N3.53 trillion to finance the projected deficit of N7.35 trillion in the FGN’s 2022 budget.
The relatively lower demand at the auction is reflective of tight system liquidity which can be partly attributed to CBN’s continuous use of the discretionary Cash Reserve Ratio (CRR) debits. According to the MPC/ CBN, the use of discretionary CRR debits are vital in controlling excess liquidity. We note that system liquidity stood at -N169.5 billion as at 18 July ‘22.” They further stated: “For Q3, the DMO plans to raise between N630 billion — N720 billion through FGN bonds. The Debt Management Office had set out to raise between N1.7 trillion — N1.9 trillion by end-Q3’22. However, year-to-date, it has raised N1.9 trillion. Therefore, the DMO is likely to exceed its borrowing target for FGN bonds by end -Q3’22. Allowing for the smaller amounts which the FGN raises from the sale of other debt instruments such as NTBs and savings bonds, it is on track pro rata to meet the domestic borrowing target for the year.