KARACHI, Oct 23: Banks and corporates continue to buy 10-year Pakistan Investment Bonds at high premiums foreseeing a drop in its yield in future.

On Wednesday banks and corporate funds bought these bonds for up to Rs110.75 per every Rs100, thus accepting 9.3 per cent yield per year against the fixed coupon rate of 11 per cent. The State Bank sold Rs12.2 billion bonds to mop up Rs13.5 billion from a fairly liquid market.

These bonds that offer six-monthly return through coupons are scripless i.e. they do not exist physically and are traded electronically. The government changes the coupon rate in line with the monetary policy of the State Bank. But the buyers are free to quote any price for the bonds, thus getting an effective yield that could be higher or lower than the fixed coupon rate.

In the last auction the banks and corporate funds had bought these bonds at an effective yield of 9.60 per cent. As the yield fell further to 9.32 per cent in Wednesday auction, this indicates that banks and corporate fund managers foresee a cut in the PIBs coupon rate. In other words they anticipate further ease off in the monetary policy.

The SBP had last cut its discount rate by one percentage point to 9 per cent in January. Since then it has kept the rate stable to contain inflation. But economists say there is still room for a further rate-cut.

“The hope for further rate-cut is so bright that the 10-year bonds started trading below the cut-off yield of 9.32 per cent immediately after the auction was over,” said a bank treasurer.

He said the secondary market buyers were buying the bonds at an effective yield of even 9.15 per cent. “There is a huge demand for the bonds. Those who could not buy (PIBs) in the auction are now buying the bonds in the secondary market to build inventory.”

Inter-bank brokers said three out of seven primary dealers i.e. state-run Habib Bank, Citibank and Union Bank bought more than 90 per cent of the total bonds sold in Wednesday auction. Primary dealers are the banks that sell government securities in the market on behalf of the SBP. Heavy buying of PIBs by the three primary dealers triggered a flurry of activity in the secondary market and those who could not buy the bonds in the auction bought it from the banks.

The auction of the bonds had generated total bids of Rs28.4 billion, but the State Bank sold only Rs12.2 billion bonds and rejected the rest of the bids. It did so to stick to the pre- auction target of Rs12 billion.

The SBP normally sticks to the sale targets of PIBs to let the market develop a long-term yield curve that is market-based. A source close to the SBP said the falling effective yield on PIBs that offered six-monthly yield did not mean the buyers were anticipating a rate-cut in immediate future. “If the investors are accepting a lower than fixed coupon rate it means they do not have alternate investment opportunities...and that they are foreseeing a rate- cut within months ...not days.”

But bankers say since the PIBs coupon rate is changed in line with the change in the SBP discount rate the bonds rate-cut may not come without a prior lowering of the SBP discount rate. Bankers say that net credit retirement by the private sector and negative government borrowing in the first quarter of this fiscal year (July-June 2002) have left the banks with no choice but to invest surplus liquidity in securities.

The private sector made net credit retirement of Rs28 billion and net government sector borrowing stood at minus Rs7.5 billion at end September.