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KARACHI, Jan 30: The State Bank is expected to cut the coupon rate on 10-year Pakistan Investment Bonds before conducting the next auction of the bonds due in February. The central bank may also lower the coupon rates on three-year and five-year PIBs in March.
SBP sources say the coupon rate must be adjusted downward in the wake of a one per cent cut in SBP discount rate on January 22. But they are reluctant to say how much reduction is expected in the coupon rate.
“I can tell you that the coupon rate of PIBs would be reduced but I can’t say by how many basis points,” said a central banker who declined to be named. Whereas the coupon rate of 10-year PIBs would be slashed in their next auction in February, the coupon rates of three-year and five-year PIBs may be announced in March.
The State Bank kept the coupon rates on three-year and five- year bonds unchanged at 10.5 and 11 per cent respectively when the bonds were auctioned on January 26. “The reason was the schedule of the auction had been announced before the discount rate-cut,” explained one central banker. The SBP announces the schedule 15 days ahead of auction and changing the coupon rates midway is simply not possible.
But he made it clear that the coupon rates of three-year and five-year bonds would be reduced before the next auction due in March.
SBP had last slashed the coupon rates on three-year and five- year bonds from 11.80 per cent to 10.5 per cent and from 12.20 to 11 per cent on November 6. The slashing was made in the wake of a 2 per cent cut in discount rate announced on October 20. At that time SBP had also lowered the coupon rate on 10-year bonds from 13 to 12 per cent. Central bankers say this rate would be further cut in February when the 10-year bonds would come up for auction.
BANKS INTERESTED: Senior bankers say liquid market conditions encouraged some primary dealers or the banks selected by the SBP for selling PIBs to buy most of Rs 8.2 billion high-yield bonds on January 22. “Since SBP had not cut coupon rates of these bonds (as the auction had been announced before the discount rate cut) primary dealers made most of the buying,” said a foreign banker.
The market was so crazy to buy these bonds that SBP received more than Rs36 billion worth of bids against pre-auction sale target of Rs8 billion. Most bids were made on premium. That is potential buyers were eager to buy these bonds at a price higher than their face value which meant a lower than fixed return for them.
FUTURE DEMAND: Bankers say the demand for PIBs is also high in secondary market where institutions, other than banks, are also buying these bonds on premium. “We believe the 10-year PIBs will also get much response when they come up for sale next month,” said a senior banker.
The list of the institutions that buy these long-term bonds for their pension and provident funds and also for themselves include such big names as (i) State Life Insurance Corporation (ii) Pakistan Insurance Corporation (iii) National Insurance Corporation (iv) Employees Old Age Benefit Institution (iv) Pakistan Telecommunication Corporation (v) Pakistan International Airlines (v) Karachi Port Trust (vi) National Fertilizer Corporation and (vii) Workers Welfare Fund, etc.
