KARACHI, March 26: The State Bank, on Saturday, had to scrap an auction of long term Pakistan Investment Bonds or PIBs because of thin demand for the bonds amidst hopes that the central bank would offer higher yields. That the market participation was one-third of the targeted sale of PIBs on Saturday auction is a proof to the fact that it is fast losing its interest in these low-yielding bonds. The result of the auction announced by the SBP showed that the auction generated only Rs1.094 billion worth of bids for three-year, five-year and 10-year bonds against the sale target of Rs3 billion. Prices quotations showed the market was demanding 6.85-7.5 per cent return on three-year bonds, 7.76-8.25 per cent return on five-year bonds and 8.3-9.25 per cent on 10-year bonds. The coupon rates on these bonds are 6, 7 and 8 per cent respectively.

The higher-than-coupon rates demand for the yields on PIBs came in the wake of tightening of interest rates so far during this fiscal year as a result of which the benchmark six-month treasury bills yield on one-year T-bill went up to 5.49 per cent on March 17.

Bankers say with one-year bills yielding five-and-a-half per cent yield, the State Bank must realize that the market would not accept 6 per cent yield on three-year bonds. They quote higher T-bills rates also to support their demand for a substantial increase in the yields on five-year and 10-year bonds.

But the government seems in no mood to raise yields on PIBs before the end of this fiscal year because it has already got enough space for increasing its borrowing from the banking system for budgetary support. Under the revised credit plan during the current fiscal year it can borrow up to Rs60 billion from the banks for budgetary support, up from the original ceiling of Rs45 billion. That makes it possible for the government to postpone its borrowing from banking and non-banking system through PIBs till June 2005. The government has made no borrowing through its long term bonds so far during this fiscal year as the market had not been ready to accept low yields on these bonds.