DMO Fails to Raise N225bn after CBN Tightens Discount Window

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DMO Fails to Raise N225bn after CBN Tightens Discount Window
Debt Management Office (DMO) fails to achieve N225 billion from sales of Federal Government (FGN) Bonds to interested market participants as subscription levels weakened following the Central Bank of Nigeria’s (CBN) recent discount window tightening.
The apex bank alleged that authorised dealers access the window in breach of its previous circular. CBN said in the circular that it observed authorised dealers’ non-adherence to the provisions. Read Dealers Infractions: CBN Tightens Access to Discount Window
However, the new circular impacted demand for FGN Bonds at the primary market auction, forcing local banks to play safe as a possible breach of CBN discount window rules attracts severe financial penalties. 
Amidst the plan to raise N720 billion in the fourth quarter as scheduled via the local debt capital market, DMO failed to raise N225 billion from its auctioned bonds target on Monday. The bond auction recorded a lukewarm subscription level amidst worsening inflation worries.
In the financial system, there have been noticeable pressures which keep money market rates at double-digit highs. Interest yields on money market instruments also appear juicy.  Higher rates in the money market reduced investors’ participation in the bond auction after interest rate hikes set fresh market catalysts for money/asset pricing in the financial market.
The demand level reported at the auction by DMO was impacted by liquidity strain in the financial system at a time when some cash-rich local banks continue to demand higher rates – amidst tightening in the Central Bank of Nigeria’s standing lending facility
The auction document showed that the DMO offered N225 billion for subscription to investors but raised N107.9 billion, through re-openings of the 14.55% FGN APR 2029, 12.50% FGN APR 2032 and 16.25% 2037 FGN bonds.
Amidst expectations for higher returns on investment, the total subscription level recorded at the auction fall through, the lowest so far in the financial year 2022 as the DMO struggle to secure a total bid of N119.2 billion at the auction.
In a market note, Coronation Research said the bids FGN APR 2029, FGN APR 2032 and 2037 benchmarks were allotted at the marginal rates of 14.5%, and 15.0% from 13.58% and 16.0%  up from 14.5% respectively.
Coronation Research said the demand at this auction largely reflects tight system liquidity amid the CBN’s contractionary monetary policy stance, fewer coupon maturities compared to September, and relatively favourable rates in the money market.
At the last MPC meeting, the CBN increased the cash reserve ratio (CRR) by 500bps to a minimum of 32.5%. This is in addition to raising the monetary policy rate from 14% to 15.5% to tame rising inflation. 
“The use of discretionary CRR debits has tightened system liquidity and has led to further upticks in rates in the interbank market. We note that overnight and repo rates closed within a range of 11 – 17% in the interbank market”, Coronation Research stated.
The CBN’s circular prohibits participants with successful bids at FGN bond auctions from accessing the discount window for short-term loans on the settlement day. This directive reduces banks funding flexibility which directly impacts participation in FGN bond auctions, market analysts said.
The debt office bond issuance calendar set out to raise a maximum of N2.5 trillion through FGN bonds to meet a domestic borrowing target of N3.53 trillion, according to a Coronation Research note.
However, year-to-date, it has raised N2.5 trillion and given that the Eurobond market remains expensive for emerging economies like Nigeria as a slew of analysts projected an increased domestic borrowing. # DMO Fails to Raise N225bn as CBN Tightens Discount Window
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