KARACHI, Aug 20: The banks paid a very high premium on 10-year Pakistan Investment Bonds on Tuesday, thus accepting a lower than fixed yield: This indicates that their hopes of interest rate cut have not faded.

The 10-year PIBs fetched a maximum premium of Rs8.86 on every Rs100 that lowered its effective yield to 9.60 per cent against a fixed yield of 11 per cent per annum.

The SBP sold Rs7.955 billion worth of these PIBs on premium to mop up Rs8.667 billion from the market. The auction of the bonds had attracted total bids worth Rs23.96 billion face value of which the SBP accepted Rs7.955 billion bids and scrapped the rest.

“The market has indicated that it is still expecting more cuts in discount rate,” said a source close to the State Bank. “The only explanation for the banks buying the bonds at a lower yield could be that they think that the current interest rates are too high,” he said.

The State Bank has been maintaining a stable monetary policy since the middle of February this year when it had last lowered the discount rate by one percentage point to 9 per cent.

On many occasions since then the inter-bank market has signalled to the central bank that it is anticipating further rate cut — both in short-term and long-term. But the SBP has paid little heed to it.

Bankers say the cut-off price of Rs108.86 per every Rs100 of the 10-year PIBs shows that the market expectation about an imminent fall in interest rates in near future is much stronger than it was in June. In mid-June the 10-year PIBs were sold at a cut-off of Rs100.83. In other words in June the effective yield on 10-year PIBs stood at a little less than 10.9 per cent against the fixed yield of 11 per cent. But now the effective yield has come down to 9.6 per cent, showing a big fall of 1.3 per cent in two months.

“What the SBP did in the PIBs auction is not indicative of anything with regard to the monetary policy,” said a source close to the SBP. “The central bank drops hint regarding any possible change in the monetary policy in the auction of treasury bills.”

The SBP is due to hold an auction of T-bills on Wednesday. Top bankers say they are expecting some crucial signals through the T-bills cut-offs.

They also say that the auction may attract very good response from the banks and the market may come out with larger than the targeted bids of Rs22 billion. Sources close to the SBP say the past record of the banks also shows that they would bid aggressively.

Senior bankers said state-run Habib Bank and a high profile American bank were the main buyers of PIBs on Tuesday. They said these and other banks also purchased the bonds for their clients.