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…Analysts Say Decision Shows Borrowing Cost Discipline
LAGOS – The Federal Government, through the Debt Management Office (DMO), resisted mounting pressure to pay higher borrowing costs at its July 2026 Federal Government of Nigeria (FGN) bond auction, opting instead to scale back allotments despite a surge in investor demand.
The move signals a more disciplined debt management strategy as authorities seek to balance the government’s huge financing needs with efforts to contain the cost of domestic borrowing.
At the auction conducted on July 20, the DMO offered bonds worth N1.2 trillion, the same amount offered in June, through the re-opening of the 22.60 percent FGN January 2035, 16.2499 percent FGN April 2037, and 15.45 percent FGN June 2038 instruments.
According to Coronation Merchant Bank’s latest economic note, investor appetite strengthened considerably during the auction, with total subscriptions rising to N1.74 trillion, compared with N1.41 trillion recorded in June.
The stronger demand lifted the bid-to-offer ratio to 1.45 times from 1.18 times in the previous month, reflecting sustained interest from institutional investors despite elevated yields.
However, rather than accommodate the additional demand by raising borrowing costs, the DMO allotted only N979.32 billion, including N50 billion in non-competitive allotments, leaving a substantial portion of bids unmet.
Consequently, the bid-to-cover ratio improved sharply to 1.78 times, up from 1.16 times in June, underscoring the strength of investor demand relative to the volume sold.
The stop rates on the two reopened benchmark instruments remained unchanged at 18.34 percent for the January 2035 bond and 18.35 percent for the April 2037 bond, while the newly reopened June 2038 bond cleared at 18.40 percent.
Analysts at Coronation Merchant Bank said the DMO’s decision to under-allot despite stronger demand demonstrates a deliberate effort to maintain borrowing cost discipline.
“The DMO chose to leave some of the demand unmet rather than pay up, marking a departure from June’s auction when it showed greater willingness to accommodate higher rates,” the report stated.
The report attributed the stronger investor demand largely to ample banking system liquidity and sustained participation by domestic institutional investors, particularly Pension Fund Administrators (PFAs).
Although average system liquidity moderated to about N4.58 trillion in June from N5.22 trillion in May following the Central Bank of Nigeria’s intensified Open Market Operations (OMO) and Treasury bill sterilisation, liquidity levels remained sufficient to support demand for government securities.
Demand for the 10-year January 2035 bond rose significantly, attracting subscriptions of N555.47 billion, translating to a bid-to-offer ratio of 1.39 times, compared with 1.18 times at the previous auction. Similarly, the 20-year April 2037 bond attracted subscriptions worth N665.19 billion, improving its bid-to-offer ratio to 1.66 times from 1.18 times in June.
The newly introduced 15-year June 2038 bond also witnessed robust demand, receiving bids worth N518 billion, representing a bid-to-offer ratio of 1.30 times.
Despite the healthy primary market performance, trading activity in the secondary bond market remained relatively weak as bearish sentiment continued to dominate.
Average benchmark bond yields rose by 55 basis points to 17.62 percent as of July 20, reflecting widespread sell-side pressure across the yield curve.
The short end of the market, comprising maturities of between zero and five years, recorded yield increases of 53 basis points to 17.92 percent.
The mid-segment, covering six to twelve years, experienced stronger sell-offs, with yields rising 71 basis points to 18.20 percent, while the long end of the curve also witnessed repricing as yields expanded by 23 basis points.
Coronation identified several factors influencing the DMO’s decision to keep stop rates unchanged despite stronger subscriptions. Foremost among them is the uncertain inflation outlook.
Although Nigeria’s headline inflation eased marginally to 15.91 percent in June from 15.93 percent in May, effectively halting three consecutive months of increases, food inflation continued its upward trajectory, rising to 17.52 percent year-on-year. According to the report, this suggests inflation may be stabilising, but risks remain elevated, making any aggressive reduction in domestic borrowing rates premature.
The bank also noted that despite maintaining the auction size at N1.2 trillion, the DMO altered the structure of its issuance by reducing the offer sizes for the January 2035 and April 2037 bonds to N400 billion each while introducing the June 2038 reopening to spread supply across more maturities.
The fact that the DMO allotted only about 82 percent of the amount offered indicates that the government is becoming increasingly focused on controlling borrowing costs rather than meeting issuance targets at any price.
Looking ahead, analysts warned that Nigeria’s substantial fiscal financing requirements would continue to shape the domestic debt market.
The 2026 Federal Government budget projects a fiscal deficit of N31.46 trillion, with planned borrowing of N29.20 trillion, implying that debt issuance will remain elevated throughout the year.
The report noted, however, that July’s under-allotment may suggest that immediate financing pressures have eased somewhat, even as the government is expected to raise an additional N4.9 trillion through bond issuances during the third quarter.
The investment bank also highlighted several factors investors will monitor closely in the coming weeks.
These include the July inflation figures, which are expected to indicate whether June’s slight moderation marked the beginning of a sustained disinflation trend or merely a temporary pause.
Market participants are also awaiting the outcome of the Central Bank of Nigeria’s 306th Monetary Policy Committee meeting, with most analysts expecting policymakers to retain the Monetary Policy Rate at 26.50 percent, reinforcing the higher-for-longer interest rate environment.
Externally, global developments remain critical.
Coronation pointed to Brent crude oil’s climb to around $88 per barrel amid escalating geopolitical tensions involving the United States and Iran, alongside the United States Federal Reserve’s continued hawkish monetary stance, as factors capable of sustaining elevated global risk premiums despite Nigeria’s foreign exchange reserves reaching a 17-year high.
Analysts believe that while domestic liquidity remains supportive of bond demand, future auctions will continue to test the government’s resolve to strike a delicate balance between funding record fiscal deficits and preventing borrowing costs from spiralling higher.
