Fed Govt Borrows Over N2trn From Bond Investors In 2020

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Fed Govt Borrows Over N2trn From Bond Investors In 2020

Leveraging on excess liquidity that persisted in the banking system and the near zero yields on treasury bills (TBs), the Federal Government, through the Debt Management Office (DMO), raised N2.1 trillion from investors in its monthly bond issuance programme in 2020.

This represents 33 percent, year-on-year, (y/y) increase when compared with the N1.58 trillion raised by the DMO in 2019.

The N2.1 trillion raised in 2020 also represents 31 percent more than the N1.6 trillion funding target for the DMO under the Revised 2020 Budget.

Meanwhile, the monthly bond auctions conducted by the DMO in 2020 recorded 275 percent oversubscription, reflecting scramble for the high yielding FGN bonds by investors.

Economic Confidential Public Finance reports on monthly bond auction results show that the DMO offered N1.825 trillion worth of bonds during the year, representing 18 percent, y/y, increase when compared with N1.55 trillion offered in 2019.

But total public subscription (investors demand) stood at N6.58 trillion, translating to oversubscription of 257 percent.

The total public subscription represents 160 percent when compared with the N1.37 trillion subscription recorded in 2019.

Furthermore, the 257 percent oversubscription recorded in 2020 represents 315 percent increase when compared with the 62 percent oversubscription recorded in 2019.

The sharp increase in oversubscription was driven by massive excess liquidity in the banking system which persisted throughout the year due to steady decline in yields on TBs.

Analysis showed that the average interest rate on freshly issued TBs also known as Primary Market bills, fell to 0.09 percent in November 2020 from 4.8 percent in December last year. This represents 4,746 basis points (bpts) decline.

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This was compounded by the exclusion of local investors from the TB’s secondary market (Open Market Operations).

Confirming the excess liquidity resulting from this trend, the CBN in its third quarter 2020, Q3’20, report stated: “Broad money supply (M3) on quarter-on-quarter basis, grew by 4.0 per cent at end-September 2020, in contrast to the 0.02 per cent decline at the end of the preceding quarter.

“Currency outside depository corporations, transferable deposits, and ‘other deposits’ largely propelled growth in monetary liabilities at the end of the review period, as securities other than shares plummeted by 28.9 per cent, attributable to the low demand for CBN bills due to relatively low yields.”

The apex bank’s report also shows a year-to-date growth of 6.69 percent, 33.5 percent and 17.34 percent respectively in Broad Money Supply (M3), transferable deposits, and ‘other deposits’ as at the end of Q3’2020.

As a result of this situation, compounded by the dearth of alternative instruments, the FGN bonds which has a record yields ranging 9.8 percent to 12.5 percent, became the most attractive and readily available investment instrument for investors in the fixed income market.

The huge demand triggered by this development is reflected in the upward trend in oversubscription for FGN bonds throughout the year.

In the first quarter, Q1’20, the bond auction recorded 249 percent oversubscription, as the DMO offered N345 billion worth of bonds, while public subscription stood at N1.2 billion. Consequently the DMO sold N706.8 billion.

The level of oversubscription rose to 361 percent in Q2’2020 as the public subscription to the N270 billion worth of bonds offered by the DMO stood at N1.25 trillion, with total bond sale at N666.8 billion.

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Oversubscription scaled down to 152 percent in the third quarter, as the DMO offered N425 billion and sold N410.9 billion worth of bonds while public subscription stood at N1.07 trillion.

But oversubscription escalated again to 226 percent in the fourth quarter as the public subscription stood at N554.67 while the DMO offered and sold N170 billion and N320 billion worth of bonds respectively.

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