KARACHI: The government returned to short-term borrowing through treasury bills, leaving the long-term bonds free to float in the market which witnessed a sharp fall of 60 to 100 basis points in the yields since the last auction held on Oct 22.
To avoid the rollover and refinancing risks, the government has been borrowing heavily through long-term Pakistan Investment Bonds (PIBs) but the price (return) being paid was too high compared to treasury bills.
The government on Wednesday raised Rs183bn through T-bills, almost all amount offered by the investors. The cut-off yield remained unchanged while it raised Rs46bn, Rs75bn and Rs62bn for three-month, six-month and 12-month treasury papers, respectively.
In the last auction held on Oct 15, the government raised Rs143bn, reflecting the change in the borrowing pattern which was more visible on the auction of PIBs held on Oct 22.
The investors offered Rs320bn to buy PIBs but the government borrowed just Rs48bn which shocked the market and investors called it an unexpected and surprise move. The immediate impact was the fall in the yields of PIBs in the secondary market.
“Since the last auction on Oct 22, the yields on PIBs have gone down sharply. Now fall is in the range of 60 basis points to 100 basis points on different tenures,” said S S Iqbal, a fund manager. The government has been under criticism for borrowing costly money instead of cheaper one but the rollover risk was haunting which forced the government to go for long-term borrowing through PIBs, mostly for three-year PIBs.
“Ever since the IMF instructed to reduce rollover and refinancing risk, the government is relying on long duration bonds, especially three-year PIBs rather than shorter duration (less than one year) T-bills,” said Vahaj Ahmed of Topline Securities.
In last 10 months, the government borrowed Rs2.1 trillion through these PIBs while net maturity of Rs1.4tr was seen in T-bills. As a result of this shift, the difference between one-year and three-year papers increased to 211bps in 2014 to-date compared to 2009-2013 average of 57bps,” he said.
Analysts believe that the government is in an awkward position as far as borrowing is concerned. It needs much more money, but the risks involved in these two kinds of borrowings could make a negative impact.
Published in Dawn, October 30th , 2014