KARACHI, June 17: The government has made a desperate move to ensure that the profits on national saving schemes do not fall sharply. The rates of profit on NSS would be revised from July 1.

Senior bankers say by setting a huge sale target of Rs25 billion for 10-year bonds to be auctioned towards the end of this month the government wants to jack up the yield on these bonds.

If that happens the government will not have to make a deep cut in the rates of return on NSS that are linked to the yield on Pakistan Investment Bonds. The SBP on Monday called the auction of the bonds and set a target of Rs2 billion for three-year; Rs3 billion for five-year and Rs25 billion for 10-year bonds. The auction would be held on June 28. Some bankers say the SBP has ignored the rules laid down for calling PIBs auction that make it necessary to give a 14-day notice to the primary dealers for holding the auction. They say that the auction should have been announced on Saturday.

No SBP official was available to explain why the auction was not called on time. But several bankers said the ministry of finance took time in deciding the target amount for the sale of PIBs. They said that the ministry was convinced that a larger target for sale of 10-year bonds would desist banks from making expensive bids for the bonds thus accepting lower yields. “They will rather be encouraged to price their bids at bit lower than in the past,” explained a senior banker adding that it would improve the yield on the bonds. In the last auction the yield on 10-year bonds fell to a little above 4 per cent and if it does not improve substantially this time then the government will have to make a very deep cut in the NSS rates. “And that simply is not possible because of its high political price,” commented another banker.

The return on 10-year instruments of national saving schemes like defence saving certificates and special saving certificates are linked with the yield on 10-year PIBs. The government fixes the rate of return on these certificates by adding a few percentage points over the average yield of PIBs in the last two auctions. Hence the government effort to improve the yield on PIBs.

OMO: As if a huge auction target of Rs25 billion for 10-year PIBs was not enough to drive banks to improve the yield of the bonds another strong signal was sent to the market on Tuesday to reinforce earlier indication. The State Bank conducted an open market operation and siphoned off Rs10 billion through one-week repo of treasury bills at 1.1 per cent. The OMO had generated bids worth Rs30.6 billion but the central bank accepted only Rs10 billion and scrapped the rest. “This again is a signal to the banks that they should not make a beeline for the PIBs in next auction and instead let its yield improve,” said treasurer of a local bank. He said the draining of Rs10 billion through the OMO from an excessively liquid market could not be seen as a support provided by the SBP to the market.

Whereas bankers generally show understanding on the need for the government to make market-based moves to keep the NSS rate recording a major fall, they say the banks should have been taken into confidence before making such moves. “We know the rationale for violating the rules in calling the PIBs auction but heavens would not have fallen had the SBP taken us into confidence,” said an annoyed banker.

THIRD MOVE: Senior bankers say the ministry of finance and the State Bank may make a third move later this month to ensure that the yield on PIBS improves to an extent where it does not warrant a major cut in NSS rates. They say the SBP may use the treasury bills auction due by the month-end to send signal to this regard.