For the second consecutive month investors frustrated plans by the Federal Government to borrow N225 billion through FGN Bonds.
Results of the debt auction for August held yesterday showed that while the Federal Government, through the Debt Management Office, DMO offered N225 billion of FGN Bonds, it was only able to raise (sell) N200.58 billion.
The failure of the FG to achieve its borrowing target yesterday was due to demand for higher interest rates by investors.
The results showed that investors wanted (quoted) interest rates ranging from 11 per cent to 15 per cent, the DMO however pegged its maximum interest rate at 12.5 per cent, 13.5 per cent and 14 per cent respectively for the 3-Years, 10-Years and 20-Years FGN Bonds.
As a result, the DMO could not accommodate N46.42 billion (about one-fifth) of the N247 billion worth of FGN bonds demanded by investors.
This represents the second consecutive month when investors’ quest for higher interest rates frustrated the FG from achieving its borrowing target through the FGN Bond auction.
Last month, the DMO could not achieve 55 per cent of the N225 billion worth of FGN Bonds offered to investors. Instead the DMO achieved total sales of N123.9 billion, representing 45 per cent of its target.
Why investors are demanding for higher interest rate
Investors have been demanding for higher interest rates since the Central Bank of Nigeria, CBN, has raised the Monetary Policy Rate, MPR, the benchmark interest rate for the economy to 14 per cent in July.
The MPR was raised to 14 per cent as part of the CBN’s efforts to reduce the amount of money in the economy in a bid to address the continuous rise in inflation. The inflation rate rose to 19.64 per cent in July, the highest in 16 years.
FG must offer higher interest rate-Analysts
According to analysts at United Capital Plc, a Lagos based investment firm, the DMO will have to offer higher interest rates in order to attract interest in FGN bonds.
They said: “Going forward into subsequent auctions, we expect marginal rates to retain current ascent, as we believe investors will remain standoff-ish. To attract fund managers’ interest, the DMO will most likely succumb to higher rates on all subsequent offerings. Also, we maintain that the hawkish stance of the CBN in its last two (2) Monetary Policy Committee, MPC meetings, hiking MPR by a total of 250 basis points will continue to drive investors’ appetite for higher rates for their funds.
“Also, we maintain that a blend of the not-so-significant expected coupon payment of N66.8bn in August, and the FG’s persistent need to rely on the domestic market to fund its fiscal imbalance, as the external debt market conditions remain unfavourable, will further shove pricing power away from the FGN/DMO and into the hands of the private sector asset managers.”
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