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KARACHI: The auction of Pakistan Investment Bonds (PIBs) saw a significant 335 basis points drop in the cut-off yield for the three-year tenor, while the government borrowed less than 50 per cent of the target on Thursday.
The sharp reduction in the interest rates amid receding inflation has changed the scenario. The government rejected all bids for treasury bills auction just a day before. This was a clear signal to the financial market that the government was trying to reduce the cost of borrowing, which eats up the entire tax revenue collection in servicing its massive debt.
The interbank market was over-liquid after the rejection of all bids for T-bills.
The State Bank of Pakistan reported that the government raised Rs83.3 billion in Thursday’s fixed local currency bond/PIB auction against the target of Rs200bn. Return on the three-year bond was cut by 335bps to 12.9pc.
Govt raises just Rs83bn against an auction target of Rs200bn
“This clearly shows that the government is improving liquidity position,” said Topline Securities.
Interestingly, the cut-off yields on three-year bonds plunged to 12.9pc from 21pc, five-year tenor to 13.4pc from 18pc, and 10-year to 13.2pc from 16.6pc in one year.
The long-term borrowing would provide short-term relief to the government as it would not need to pay just next year; however, in the long term, it would create a massive burden on the economy. The PIBs are the largest part of the government’s domestic borrowing.
“It’s important to have a robust yield curve for the bond market. Rejecting yesterday’s T-bills auction had a good effect on the market. The surplus liquidity and expectations of rapidly declining yields fetched a decent amount in longer tenors with some semblance of a yield curve,” said Faisal Mamsa, CEO of Tresmark.
Governments have been accumulating long-term PIBs to avoid immediate payments, which has resulted in huge PIBs as part of domestic debts.
Up to July, the total domestic debt of the central government was Rs47.7 trillion while the PIBs constituted Rs28.15tr.
“Yields declined significantly in today’s auction, with the three-year tenor witnessing a cut-off reduction of 335bps, reaching 12.9pc (lowest since March 2022) and the 5-year tenor seeing a reduction of 190bps, settling at 13.4pc (lowest after November 2022),” said a report of Arif Habib Ltd. Thursday’s auction also offered a two-year PIB, with a cut-off yield of 13.98pc.
The financial market was more interested in seeing a trend in the next T-bills auction after a drastic reduction in the PIB rates and the next interest rate cut.
The SBP has cut its policy rate from 22pc to 17.5pc in three reviews since June. However, the business community is demanding another immediate cut of 300bps to revive economic activities, but the central bank remains cautious.
Published in Dawn, September 20th, 2024
