KARACHI: The government on Wednesday increased cut-off yields on Pakistan Investment Bonds (PIBs) to encourage banks and others to invest in long-term papers.

However, the current fiscal year’s first auction of PIBs witnessed a fall in investors’ interest as the amount realised was Rs56 billion against the target of Rs100bn.

The cut-off yield on three-year PIBs was raised by 29 basis points to 12.38 per cent. Of Rs56bn, the highest amount (Rs32.2bn) was invested in three-year PIBs.

Experts watching the development said the increase in the cut-off yields ahead of monetary policy announcement, scheduled on July 19, could be significant.

“The amounts auctioned were small, and the central bank could have rejected the higher bids, therefore higher cut-offs could imply higher interest rates in the near future,” said Faisal Mamsa of Landmark Capital.

As the main inflation at the end of FY2013-14 remained higher than the previous year’s while the average rose to 8.62pc, apparently there is no chance for a cut in interest rate in the coming monetary policy.

This anticipation helped the investors to demand higher rates while the State Bank raised almost half the amount set for the auction.

“Most traders went to the auction seeking higher rates, although expectations were that all higher bids would be rejected, so a higher cut-off has sprung a surprise,” said Eman Khan of Aerari, an application which tracks market rates.

The investors placed Rs9.9bn for five-year and Rs11.8bn for 10-year PIBs. The cut-off yields on both the papers were raised by 25 basis points to 12.80pc and 21 basis points to 13.20pc respectively.

The cut-off yield on 20-year PIBs was increased by 11 basis points to 13.11pc while an amount of Rs2.09bn was invested.

The higher return on PIBs attracted investment on large scale from the banks and other investors. According to the SBP, the holdings of PIBs till March 31 were of Rs2.356 trillion. However, at the end of June (during three months) the holdings of PIBs rose to Rs3.2tr.

About 65pc investment in PIBs were made by the banks, helping them to earn more profit, even much better than investing in treasury bills. Analysts in their report said the huge investment in PIBs would increase the banking sector profits up to 13pc.

Though banks have started shifting their focus to the private sector, high yields on PIBs could convince them to keep investing in the risk-free government papers.

Published in Dawn, July 17th , 2014