KARACHI, Sept 23: The weighted average yield on three-year and five-year Pakistan Investment Bonds fell on Monday as banks stuck to their forecast of lower interest rates in future.

Senior bankers said the weighted average yield on three-year and five-year bonds came down to 7.46 and 8.28 per cent on Monday from 7.95 and 8.88 per cent as on July 19 when these bonds were last auctioned.

The PIBs yield declined as the banks came up with much larger bids for the bonds than the sale target of Rs7 billion. Central bankers dubbed as speculative many of the total bids of Rs22.5 billion on the face value but senior bankers termed the heavy bidding as “hedging against cash flows” in anticipation of rate cuts in future.

The State Bank honoured the sales target of Rs7 billion set together for three-year and five-year PIBs and mopped up Rs7.18 billion by selling them at high premiums: the bids received for the bonds was more than three times this amount — Rs22.5 billion at face value but the SBP scrapped all the bids beyond the auction target.

The banks and the corporates had come up with the bids at very high premiums — between Rs100-Rs104.28 for three-year bonds and Rs103.96-Rs107.06 for five-year bonds. But the SBP accepted the bids at a cut-off of Rs103.96 for three-year and at Rs106.95 for five-year to suck in Rs3.024 billion through sale of three-year bonds and Rs4.156 billion through five-year bonds strictly in line with the targets.

The pricing of the bids shows that banks and corporates bought three-year and five-year bonds at an effective annual yield of 7.5 per cent and 8.27 per cent against their fixed coupon rates of 9 per cent and 10 per cent respectively. Analysts said they did so anticipating that an interest rate cut was in train. “What the market is seeing (these days) is that there is huge liquidity inflow but unfortunately the demand for the liquidity is limited,” said chief executive of BMA Capital Management Farrukh H. Khan. “The private sector credit is not picking up,” he said adding “banks and corporates are forced by this liquidity inflow to price the bids (of government papers) at lower rates — expecting a rate-cut in future.”

The market has been excessively liquid these days on the back of heavy foreign inflows that translate into rupee liquidity amidst low credit demand by the private sector. So the banks are rather forced to employ surplus liquidity in government security papers like treasury bills and PIBs.

At times the State Bank mops up more than targetted liquidity from the market through treasury bills but it normally sticks to the sale target of PIBs. It does so to keep banks from piling up PIBs primarily designed for the corporates. Besides mopping up of more than targetted amount means lowering of weighted average yield on PIBs which the SBP wants to avoid as this can lead to cut in national saving rates.

“The central bank is honouring sales volume targets (of PIBs) and it is the demand and supply that is setting the price,” said treasurer of ABN Amro Bank Dr Naim Abdullah. When asked if lower pricing of PIBs was an indication that the banks and corporates were anticipating further rate cuts he said: “Certainly there are buyers who want to buy these papers at these prices. If they do not buy they think they may take a hit and that hit may come in the shape of reduced interest rate.”

The SBP has been maintaining a stable monetary policy since mid-February 2001.