Monumental increase in investors’ demand for government securities like Treasury Bills (TBs) and sovereign bonds has enhanced government’s capacity to fund its expected budget deficit of 2.97 percent or N1.105 trillion in the 2012 fiscal year.
This is because rising risks in the equities market following a streak of losses; and paucity of viable investment options have further increased investors’ flight to safety and appetite for TBs and bonds, considered safe and more viable. Government’s local debt profile stands at N5.5 trillion with FGN Bond accounting for 62.98 percent; Treasury Bills 30.73 percent and Treasury Bonds 6.29 percent.
BusinessDay investigation shows that out of a total N971.22 billion sovereign bonds issued by the Federal Government in 2011, investors subscribed N1.735 trillion or 219.31 percent.
January 27, 2012, at the auction of N35 billion 10 year bond, investors subscribed N59.92 billion or 171.2 percent. A five year N15 billion bond issued on July 20, 2011, attracted N46.3 billion demand or 308.80 percent, at a margin rate of 10.70 percent, whereas investors subscribed N44.05billion or 555.63 percent to a three year N8.0 billion bond issued October 14, 2011 at a margin rate of 15.50 percent. This compared with a drop in investors’ demand from N2.14 trillion in 2011 to N1.075 trillion bonds issued in 2010. The ten year N30 billion bond issued December 4, 2011 was 201.83 percent subscribed at margin rate of 15.0 percent.
In 2011, investors lost some whopping sums in the equities market, as the all- share index lost 16 percent. Market capitalisation went down by 17.45 percent, to N6.53 trillion.
At present 3 year bonds attract yields of 15.99 percent, while investors are earning 15.99 percent and 15.75 percent from 7 year and 10 year bonds respectively.
In the money market, rates are climbing following the CBN restrictive monetary policy with 91- day Treasury Bill trading at 14.7 percent, and 364- day TB closing at 16.89 percent in February 2012. With zero risk attached to government securities, the high yields in Treasury Bills and bonds have made the instruments more attractive than equities, especially with inflation at 12.6 percent.
There are also perceptions that the Central Bank may relax its monetary policy to avoid cost-pushed inflation. According to FSDH Securities Limited, the CBN may opt for Open Market Operation to manage excess liquidity.
Analysts say the rush for bonds is a boost to government’s plan to finance its budget deficit through the bond market. In the 2012 budget, government is projecting a deficit of 2.97 percent or N1.105 trillion. Although lower than the 2011 deficit of 3.62 percent or N1.136 trillion, analysts say the 2012 deficit may increase, with reports that the National Assembly may raise the budget figure, and expectation of supplementary budget later in the year.
Egie Akpata, Head, UBA Securities, agrees that the increased demand for bond could enhance government ability to finance its deficit but pointed out that this would depend on the bid price. There is a range of prices quoted in the DMO bond auction and the cut- off point determines the price.
The country’s debt /GDP ratio at 19 percent is far below the global maximum of 40 percent and with investors’ growing appetite for sovereign bonds, dealers say government could go ahead to borrow more, provided such money can be productively deployed. They also believe that the huge demand for sovereign bonds suggests that government budget gap would be fully financed.
