August 27, 2003	Wednesday	Jumadi-us-Sani 28, 1424

KARACHI, Aug 26: The government may lower the coupon rates on the existing Pakistan Investment Bonds to pave the way for the launch of a new version of these bonds.

Sources close to the State Bank say the coupon rates on three -year, five-year and 10-year bonds may come down before their scheduled auction sometime in September.

The SBP holds quarterly auction of these scripless bonds whose yields serve as benchmarks for determining the return on national saving schemes. The rates of return on NSS are revised every six months.

The government is set to launch a new version of PIBs possibly with a maturity period of 15 years to provide an opportunity to long-term investors, particularly the provident and pension funds holders. But since the coupon rates on the existing PIBs are too high the government may not launch a longer-term version of the bonds without first lowering these rates. The coupon rate is seven per cent on three-year PIBs; eight per cent on five-year and nine per cent on 10 years.

The coupon rates — unchanged since November last year — need a downward revision because the effective yield on PIBs has fallen much below their coupon rates in the falling interest rate environment. In the last auction of the bonds held in June 2002, the yield on three-year, five-year and 10-year bonds stood at 3.22 per cent, 4.29 per cent and 5.67 per cent, respectively. These cut-off yields on PIBs were substantially higher than in March but were still far below their coupon rates.

In the auction held in March 2003, the cut-off yields on three-year, five-year and 10-year bonds stood as low as 2.87 per cent, 3.20 per cent and 4.03 per cent, respectively. The yields on these bonds shot up in June primarily because the government had set an unusually large target of Rs30 billion for selling these bonds.

The purpose was to lift the yields to a reasonable level so that the government should not have to cut the rates of return on NSS too aggressively. The ploy worked well.

But since the yields had been stabilized rather artificially they did come down after the June auction — widening the gap between the cut-off yields and the coupon rates of the bonds. It is against this backdrop that the commercial bankers say — and central bankers second this view — that the government will have to lower the coupon rates on the existing PIBs to pave the way for launching 15-year bonds possibly in the next quarter of this fiscal year.

If the government does not lower the coupon rates on existing bonds it will have to set the coupon rate on 15-year bonds at a very high level — may be 12 per cent or so — and that is what the government would not do. “Not only because it would increase the cost of government borrowing — but also because this rate is not in line with the present interest rate structure,” said a senior banker. Bankers anticipate a downward revision in coupon rates of existing PIBs before their next auction in September because the stage seems set for the launch of 15-year PIBs immediately after that.

“It seems less likely for the government to include 15-year bonds in the next auction of existing bonds due in September,” said treasurer of a foreign bank. Had the government intended to sell 15-year bonds together with the existing bonds in September it would have taken institutional investors into confidence — and informed primary dealers in advance.