FG taps N1trn as 2038 bond becomes key borrowing instrument

The Federal Government will return to the domestic debt market on Monday with a N1 trillion bond offer, reopening its 15.45 per cent FGN June 2038 bond for another N600 billion as borrowing pressures continue to mount.

The Debt Management Office (DMO) will also offer a new 10-year FGN bond maturing in September 2036 for N400 billion, bringing the total offer to N1 trillion. The auction is scheduled for September 14, with settlement on September 16.

The latest issuance further underscores the growing importance of the June 2038 bond in the Federal Government’s financing strategy. The security, originally issued in June 2023, has been repeatedly reopened as the DMO seeks to raise substantial funds through an instrument already familiar to investors.

The bond carries a fixed coupon of 15.45 per cent and matures on June 21, 2038. However, investors do not necessarily earn the coupon rate because their actual return depends on the price paid at auction and the resulting yield to maturity.

The scale of the latest offer contrasts sharply with the bond’s original issuance. The 2038 paper was first offered at N90 billion in June 2023 before subsequent reopenings significantly expanded its size.

Investor appetite has also remained strong. At the August auction, the DMO offered N750 billion of the June 2038 bond and received subscriptions of N821.32 billion. It allotted N631.02 billion through competitive bids and another N742.29 billion through the non-competitive window, taking total allotment above N1.37 trillion.

The marginal yield fell to 17.79 per cent in August from 18.40 per cent in July, suggesting some easing in the return investors demanded to lend to the government.

Monday’s N600 billion offer will add further to the stock of the bond and reinforce its role as one of the government’s major domestic borrowing instruments.

For the Federal Government, repeatedly reopening an existing bond provides a relatively efficient way to raise large amounts without introducing an entirely new security each time. For investors, however, the size of the issuance also reflects the government’s continued dependence on the domestic capital market to finance its budget and meet funding obligations.

Nigeria’s 2026 borrowing plan has been raised to N29.20 trillion from the earlier N17.89 trillion, while total expenditure is projected at N68.32 trillion against revenue of N36.87 trillion. Debt service is estimated at N15.81 trillion, including N10.16 trillion for domestic obligations.

The scale of borrowing has wider implications for the economy because government securities compete with businesses for available funds. Attractive yields on sovereign debt can encourage banks and institutional investors to favour government instruments, potentially keeping borrowing costs high for manufacturers, traders and other private-sector operators.

Monday’s auction will therefore be closely watched for more than the amount raised. A further decline in yields would point to improving investor confidence and potentially lower government funding costs, while a rise would indicate that investors are still demanding substantial compensation to commit money to long-term government debt.

The new N400 billion September 2036 bond will provide an additional test of investor appetite, with its pricing expected to emerge from the auction.

As the government turns increasingly to domestic borrowing to bridge its financing gap, the outcome of the N1 trillion sale will offer a fresh indication of where sovereign yields are headed and how much it will cost the economy to finance the country’s widening fiscal gap.