0
KARACHI, Oct 7: The government has decided to add 15-year and 20-year Pakistan Investment Bonds to the list of the existing three tenures, but it is yet to announce when these bonds will come up for sale.
The government has issued a notification that said that the maturity period of Pakistan Investment Bonds would now be three years, five years, 10 years, 15 years and 20 years. But the notification did not say when the 15-year and 20-year PIBs will be offered for sale.
“The timing is yet to be decided,” said Dr Ashfaque H. Khan, director general of debt office at the Ministry of Finance.
“The 15-year and 20-year bonds are being introduced chiefly to provide a longer term yield curve to the market,” he said when reached over telephone in Islamabad. “The purpose is to provide banks with a benchmark for pricing long-term loans, particularly in the housing sector.
When asked whether the government would offer the 15-year and 20-year bonds for sale in November along with those of three-year; five-year and 10-year maturity, he declined to make any comment. “I can only say that these bonds are for a different purpose and should not be mixed with the jumbo issue of PIBs,” Dr Khan said.
Last month the government announced a Rs50-billion jumbo issue of PIBs and decided to sell them in three instalments. The first instalment of Rs25 billion came up for sale on October 4, but instead of sticking to the target the State Bank sold only Rs7.59 billion worth of these bonds and scrapped the remaining bids. Top bankers say the SBP did this to keep the rise in the cut-off yields within limits. They say had the SBP accepted bids worth Rs25 billion and allowed a sharp increase in the cut-off yields in the process that would have sent the signal that it is going to tighten its monetary policy stable since November last.
“That is true,” says Dr Khan. “There is no need to tighten the monetary policy,” he said pointing to the year-on-year inflation of 1.58 per cent recorded in the first two months of this fiscal against the full year target of four per cent. But he hastened to add that making some adjustments in the interest rate structure was not uncalled for. “The central bank does this whenever needed.”
On October 4, the SBP increased the cut-off yield by 93 and 85 basis points on three-year and five-year PIBs, respectively, and by 58 basis points on 10-year bonds. Earlier, it had also increased treasury bills yields. Top bankers say the upward adjustment in PIBs and T-bills yields shows the interest rates have bottomed out and that it wants to save banks from taking further hits on profitability. And above all, the central bank is providing an enabling environment to the banks to revise upwards their rates of return on deposits. The weighted average rate of return on bank deposits as a whole plunged to a humiliating low of 1.90 per cent at the end of June against 3.1 per cent inflation recorded in the last fiscal year.
BANKERS CONCERN: Bankers say if the government does not sell 15-year and 20-year PIBs along with PIBs of other tenures in November-December auctions this may create problem for banks awash with excess liquidity. Some bankers say if in the next two auctions PIBs of only three-year, five-year and 10-year are offered either the cut-off yields will rise sharply or the government will have to miss the Rs50 billion target as a whole.
Dr Ashfaque H. Khan says it will depend chiefly on how much the market is liquid and how does it behave in the PIBs auction. But he does not comment on whether the government would stick to the Rs50 billion target set for selling PIBs in this quarter or let it slip by.
SECONDARY MARKET: Senior bankers and stock brokers say longer term bonds will promote a culture of long-term investment in the country and deepen financial markets. “This will help develop a longer term secondary debt market in the long term,” says former chairman of the Karachi Stock Exchange, Arif Habib.
He said that the introduction of 15-year and 20-year PIBs would help the banks restart long-term project financing, particularly in the housing sector. “Besides, banks with excess
liquidity will have another viable area for parking money — and will be able to revisit their rates of return on deposits as well.”
Asked how the launch of the longer term bonds will impact on investors behaviour amidst listing of NBP and OGDCL shares due this month, he said: “OGDCL will primarily attract retail investors as it is likely to offer short-term gains.”
He said NBP shares may initially attract institutional investors, but made it clear that if the government does launch 15-year and 20-year bonds next month it may get enough response despite NBP and OGDCL listings.
NBP is going to sell 13.13 million shares worth Rs604 million for public subscription and OGDCL is set to offer 215 million shares worth Rs6.9 billion — the largest listing since that of PTCL in 1996.
