October 5, 2003	Sunday	Sha’aban 8, 1424

KARACHI, Oct 4: The State Bank on Saturday sent another clear signal to the market that it wants to keep the interest rates stable and avoid volatility. But to send this signal it had to miss the sale target of long-term Pakistan Investment Bonds.

The SBP sold Rs7.59 billion PIBs against the sale target of Rs25 billion — and much below the actual amount of the bids received in the auction i.e. Rs36 billion. Had the central bank met the target the cut-off yield on all tenures of the bond would have risen sharply.

“That was not our idea,” said a senior SBP official. “We gave a clear signal to the market (by allowing the yields to rise modestly) that we want to keep the interest rate stable,” he told Dawn but refused to go on record.

The auction of the bonds generated Rs38 billion bids from the banks awash with excess money, but the central bank accepted bids worth about Rs7.6 billion only and scrapped the rest. Last week, the SBP had rejected majority bids for three-month treasury bills and scrapped all bids for one-year bills also to signal that it wants to keep the interest rate stable.

The SBP said the auction generated bids worth Rs20 billion for 10-year bonds. But it sold only Rs5.9 billion of these bonds at a cut-off yield of 6.25 per cent, up from 5.67 per cent in June. It scrapped the remaining bids for the simple reason that the cut- off yield would have risen to 6.45 per cent had all the bids been accepted. The central bank had set a pre-auction sale target of Rs13 billion for 10-year bonds that carry a coupon rate of eight per cent.

“Even at the present level the yield on 10-year bond is up 58 basis points from where it was in June,” said a senior central banker. “Further increase in the yield would have sent a signal that the interest rates are going to rise sharply. How could we send such a signal?”

The central bank sold Rs527 million worth of 10-year bonds to retail investors separately at a weighted average yield of 6.22 per cent.

The SBP received about Rs5.7 billion bids for five-year bonds but it sold only Rs1.2 billion of these bonds at 5.15 per cent, up from 4.30 per cent in June. Here also the yield showed an increase of 85 basis points even when the central bank sold much lesser amount of PIBs than targeted. The SBP had set the sale target at Rs7 billion for five-year bonds that offer a coupon rate of seven per cent. The SBP sold Rs36 million worth of these bonds separately to retail investors at a weighted average yield of 5.09 per cent.

The three-year bonds carrying a coupon rate of six per cent attracted total bids worth Rs7.2 billion, but the State Bank sold only Rs450 million worth of these bonds. The cut-off yield went up to 4.15 per cent from 3.22 per cent in the last auction held in June. Retail investors did not come up to invest in three-year bonds.

JUMBO ISSUE: The Saturday auction of PIBs was the first of the three planned for October-December. The government had announced in the middle of last month that it would sell Rs50 billion PIBs in the last three months of this year. It had divided this jumbo issue into three separate auctions, the first one with a target amount of Rs25 billion in October; the second one of Rs13 billion planned for November and the last one of Rs12 billion to be held in December. Some bankers say by not honouring the very first auction of the jumbo issue “the SBP has set a bad precedence.”

But central bankers say since the Rs25 billion auction was a part of the Rs50 billion jumbo issue auction planned for October -December the SBP may sell a larger amount of bonds in November- December. “But if the purpose behind this move is to keep the interest rate stable the result would not be in line with the SBP expectation,” said treasurer of a local bank. “Banks will start bidding for the bonds next month from the cut-offs seen on Saturday,” he said, adding that since the sale target amount would also be high the SBP will find it difficult to keep the interest rate stable. “Either it will have to let the yield rise further or it will again miss the auction target,” feared another senior baker.