KARACHI: The auction of Pakistan Investment Bonds (PIBs) on Wednesday surprised investors as the government raised just Rs50 billion out of total bids offered worth Rs329bn.

The cut-off yield also dropped, reflecting the presence of ample liquidity in the banking system. The surplus liquidity dropped the yield on PIBs in the secondary market too. The investors offered Rs242bn for three-year PIBs but the government raised just Rs19.77bn which was shocking for the investors as they believed that the government needed money.

“Since the market was expecting large selling of three-year PIBs, the investors started offering bid with lower rates which finally resulted into drop in the cut-off yield,” said S.S. Iqbal, a fund manager.

The cut-off yield of three-year PIBs fell by 11 basis points to 12.48pc which put pressure on the secondary market where yield fell to 12.15pc.

The three-year tenor has been a hot cake for investors and the government raised huge amount by selling it in the past.

Till the end of September, the government raised Rs3.457 trillion through selling of PIBs and most of the money was raised through three-year tenor. The government also massively borrowed through PIBs in the previous fiscal year.

However, the government set Rs150bn as target for the second quarter (Oct-Dec) of the current financial year and showed its commitment to remain within the limit.

The cut-off yield on five-year and 10-year PIBs also fell by two and one basis points and the government raised Rs19.1bn and Rs9.1bn, respectively.

“The Wednesday auction was critical in terms of setting the mood for the remaining auctions of the quarter,” says Eman Khan of Aerari, an application that tracks financial markets. “The participation was overwhelming, six times of the target of Rs50bn.

“This was primarily because the last two T-bill auctions were undersubscribed, hence the banks had excess liquidity to park in the first auction of the quarter,” he said.

Financial experts said the returns on PIBs were too high compared to the policy interest rate and T-bills. The government has come under severe criticism for opting for costlier money while cheaper money was available on the market.

The T-bills rates for three, six and 12 months in the last auction were 9.95pc, 9.97pc and 9.99pc, respectively.

Published in Dawn, October 23rd, 2014