KARACHI, Nov 19: The State Bank says it plans to launch the first government bond index to provide "history and trends of sovereign bonds as well as corporate bonds" to investors.
A notification posted on the website of the central bank said the GOP Bond index would be launched in the first week of January. The SBP has invited feedback and comments from all market participants by December 10, 2004 to help it finalize the modalities of the bond index.
The index that will use January 1, 2004 as the base date and a base value of 100 will include liquid issues of Pakistan Investment Bonds or PIBs, based on the data provided by the SBP.
The notification says that since corporate bonds are not liquid and their pricing is negligible, the central bank is developing a government bond index in the first phase, excluding the corporate bonds.
It says that the Financial Market Association that groups treasury officials of banks and inter-bank brokers will own the bond index jointly with a brokerage house. It further says that input prices will be taken from Reuters and index will be disseminated through Reuters/Bloomberg at the end of the day.
The development of a government bond index will help remove distortions in the yield curve, which makes it difficult for the government to raise domestic debt at the desired cost. It will also help the market demand realistic yields on the bonds.
The government has not been able to sell PIBs after May this year as the market was demanding a higher yield on them than the government was ready to pay. Once a government bond index is introduced, it will help both the issuer of the bond and the investors avoid taking unilateral and extreme view of their pricing.
That will help the government raise more debt through secondary market thereby reducing its dependence on bank borrowing on the one hand, and on the other give corporate investors a chance to employ surplus funds in risk-free instruments with the confidence that they would earn market-based profits.
The government had launched three-year, five-year and 10-year PIBs in 2000 to raise long-term debt from non-bank sources but eventually these bonds became the darling of the banks.
