FG cuts savings bond rates to record low on strong retail appetite
The Federal Government of Nigeria has cut the interest rates on its savings bonds to the lowest levels on record to take advantage of strong investor appetite amid negative real returns on its short-term debt securities to borrow cheaper.
The interest rates on the twoyear and three-year FGN savings bonds were lowered to 9.091 percent and 10.091 percent per annum, respectively, according to a notice for December auction released Monday by the Debt Management Office (DMO).
These rates are the lowest since March 2017 when the
DMO, which is offering the retail product on behalf of the FGN, conducted its maiden savings bond auction. “The alternative to savings bond for retail investors is treasury bills which are currently at low-yield levels,” Omotola Abimbola, a micro and fixedincome analyst at Lagos-based Chapel Hill Denham said. He noted that “the DMO had to re-price the savings bonds lower to reduce the cost of borrowing for the Federal Government” following a “healthy retail participation”. The Federal Government’s plans to cut its borrowing cost and ramp up its revenue collection have led the CBN to restrict participation in its Open Market Operations (OMO) to foreign investors and local banks, a move that left individual and non-bank local corporate investors searching for alternative investable options to reinvest proceeds of OMO maturities. Consequently, investors rotated into treasury-bills market, forcing interest rates on T-bills at the last auction to crash to 6.495 percent, 7.23 percent, and 8.37 percent on the 91-day, 182-day and 364day papers, respectively, the lowest since January 6, 2016. The average discount rate on the bills at the secondary market also declined to 6.86 percent last week from 12.25 percent a month earlier. Similarly, rates on FGN savings bonds trading at the FMDQ have declined within the past month. For instance, the yield on 13-DEC-2019 maturity fell to 5.99 percent on November 29 from 12.39 percent at the close of business on September 20, while the yield on 16-AUG-2022 maturity declined to 11.58 percent from 14.23 percent within the same period. “What we do with those bonds is pricing,” Patience Oniha, director-general of DMO, had said while explaining the rationale behind changes in auction rates in an exclusive chat with BusinessDay. “We look at what our benchmark bonds are trading at FMDQ, and we apply that.” The state-funded debt agency said the subscription of the savings bonds, which commencedonmonday,december 2, is expected to end on Friday, December 6 with a settlement date of December 11, 2019. Furthermore, the DMO noted that the two-year tenor will be due on December 11, 2021, while the three-year savings bond will mature on December 11, 2022. Also, interest payment on the instruments will be made every quarter on March 11, June 11, September 11, and December 11. The bonds are offered at N1,000 per unit subject to a minimum subscription of N5,000 and in multiples of N1,000 thereafter. But that’s limited to a maximum subscription of N50 million. The DMO assured that the bonds are backed by the full faith and credit of the Federal Government of Nigeria and charged upon the general assets of the country, implying there is no risk of default. However, the debt agency said those investors who do not wish to hold on to the securities till the maturity date can trade their investments at the secondary market as the securities will be listed on the Nigerian Stock Exchange. The DMO noted that the bond qualifies as securities in which trustees can invest under the trustee investment act; government securities within the meaning of Company Income Tax Act and Personal Income Tax Act for tax exemption for pension funds, amongst other investors; and as a liquid asset for liquidity ratio calculation for banks.