KARACHI: The bonds market got signal for further cut in interest rate, as cut-off yield on Pakistan Investment Bonds (PIBs) was again slashed up to 31 basis points on Wednesday.

The State Bank reported that the yield on three-year bonds was cut by 30 basis points to 10.59 per cent, five-year bonds to 10.79pc by 31 basis points and 10-year PIBs to 11.70pc by 29 basis points.

The government raised more than the target set for the entire quarter in the auction while banks invested heavily in three-year papers.

The banks were eager to park maximum money for long-term bonds as they offered Rs337 billion in the auction.

The government raised Rs151.3bn through the auction while the target set for the entire quarter was Rs150bn.

Banks invested the highest amount in three-year PIBs worth Rs91bn while they offered highest amount of Rs157bn for it.

For five-year PIBs, Rs24bn and for one-year PIBs, Rs36bn were raised, respectively. Bonds are the prime priority for banks as they invest more than 82pc of their liquidity in government papers. The auction reflects the same path adopted by banks.

The market witnessed large trading in 10-year PIBs and the cut off yield fell sharply in the secondary market.

“The way market behaves regarding PIBs, it seems the next monetary policy could see another cut in the interest rate,” said S S Iqbal, a senior fund manager.

He said that 10-year bonds were traded as low as 11.30-40pc in the secondary market which was even less than the rate fixed by the government on Wednesday at 11.70pc. The three and five-year PIBs were not in high demand.

He said the next auction will be held after the announcement of monetary policy, which would help the market anticipate about the future interest rate trend.

What was encouraging for the market was the low inflation which was even lower than 4pc in November. However, some analysts believe that the government needs Rs580bn to get rid of the circular debt.

“Banks may not provide such a huge amount which means the government could find it easy to print money that could escalate inflation,” said a banker.

Published in Dawn December 18th , 2014