KARACHI, June 9: The government looks set to increase the coupon rates of long-term Pakistan Investment Bonds (PIBs). The new rates may be announced within a couple of days i.e. when the State Bank announces the schedule of the PIBs’ next auction.

A senior source close to the Ministry of Finance confirmed to Dawn that an upward revision in the coupon rates of PIBs is on the cards. But he declined to say how much increase was likely.

The current coupon rates on three-year, five-year and 10-year bonds are six, seven and eight per cent respectively. These rates, set in October 2003, clearly require upward revision because short-term rates have seen huge increases since then.

Currently the weighted average yields on three-month, six-month and one-year treasury bills stand at 7.38pc, 7.90pc and 8.29pc — far higher than where they were in May 2003 and high enough to warrant an increase in the coupon rates of PIBs.

That is why financial analysts expect at least two percentage points’ increase in the coupon rates of PIBs. “I think the government should increase the coupon rates by 200-250 basis points (on three-year, five-year and 10-year bonds),” said Muhammad Sohail, head of research at Jahangir Siddiqui Capital Market.

The government failed to sell PIBs so far during this fiscal year only because it not only refused to increase the coupon rates but also blocked an increase in their effective yields. In the last successful auction of PIBs in May 2004, the effective yields on three-year, five-year and 10-year bonds stood at 4.23pc, 5.27pc and 7.13pc — all below the coupon rates.

But at that time the central bank was following a loose monetary policy and overall interest rates were low. Since the start of this fiscal year in July 2004, the SBP started a gradual tightening as a result of which short-term interest rates increased far beyond their May 2004 level. But ignoring this ground reality the government not only kept the coupon rates of PIBs unchanged, it also did not allow their effective yields to rise. Hence, the market lost interest in these bonds.

The coupon rates of 15-year and 20-year bonds set at nine and 10 per cent respectively in October 2003, also remain unchanged. Financial analysts say while reviewing the coupon rates structure of PIBs, the government should also revise upwards the rates on 15-year and 20-year bonds. But whether it will announce new rates on PIBs of all tenures or on PIBs of three-year, five-year and 10-year maturity depends on which tenures of the bonds the government is going to auction this month.

Chances are that the government would offer for sale, three-year, five-year and 10-year bonds after announcing an increase in their coupon rates. Then, the government would also allow an increase in their effective yields keeping in view the increase in the coupon rates and the medium to long term interest rates outlook.

Some analysts say if the effective yield on three-year, five-year and 10-year bonds are not raised by one to two percentage points above the one-year T-bills rates, corporate investors would remain shy of parking funds in these bonds. But others say since the stock market has lost its earlier charm, corporates, insurance companies and pension and provident fund managers would not be looking for a very sharp increase in the yields while investing surplus funds in the PIBs.