KARACHI, June 12: Effective yield on Pakistan investment bonds may remain under pressure in the next auction of the bonds due later this month. But if small banks that have been stockpiling these bonds ignoring the instructions of the State Bank do not make big buying — and if corporate buyers of the bonds switch over to stock market the situation may be different.
Senior bankers say that the yield on long-term bonds may fall further as enough demand for the bonds that exists in the market would encourage banks and corporates to buy the bonds at higher prices. Because of a good demand for them the bonds are sold on premiums — and a higher premium on the bond means that the buyer is willing to accept a lower effective yield.
The cut-off yield on 10-year bonds carrying a coupon rate of 9 per cent had fallen to just two basis points above 4 per cent — and senior bankers say the next auction of the bonds may not see any improvement in it. “The yield may rather fall further,” said treasurer of a local bank. But he said a downward revision in the coupon rates of the bonds did not seem on the cards. The government had last lowered the coupon rates in November 2002 bring them to 7 and 8 per cent respectively on three and five year bonds and to 9 per cent on 10-year bonds.
Major buyers of the bonds are banks and pension and provident funds of corporates and state-run institutions. Insurance companies also invest heavily in these bonds. But since the stock market has been bullish for quite some time some institutional buyers are sure to prefer stocks over PIBs. “If that happens and the demand for the bonds see a decline than the next auction of PIBs may not see a major decline in the yield,” said treasurer of another local bank. “Much would also depend on the sale target.”
COUPON RATES: Some bankers say since the differential between the coupon rates and the effective yield on PIBs has widened to roughly five per cent in case of 10-year bonds the government may have to revise coupon rates. But others say this alone does not offer enough justification for the move. “The gap has widened but that does not matter,” said treasurer of a foreign bank. “What matters is the effective yield on the bonds,” he said. But those who anticipate lowering of coupon rates say this is necessary to give a sense of direction to the market.
“If the government foresees falling interest rates in medium and long term...and if the yield on PIBs continue to fall then there is no reason for keeping the coupon rates unchanged,” said head of treasury of a local private bank.
BUDGETARY TARGET: What else points to possibility of further fall in the effective yield on PIBs is that the government has set a lower target for the next fiscal year for raising domestic debt through these bonds. The government intends to raise Rs15 billion in next fiscal year through sale of PIBs. The target for this fiscal year was Rs25 billion — and it is likely to be met.
Senior bankers say the relatively low target of selling PIBs in the next fiscal year may lead to higher demand for the bonds — and that in turn may lower their yield.
SECONDARY MARKET: The yields on the bonds trading in secondary market have already fallen much below the coupon rates. Bankers say the three-year and five-year bonds carrying coupon rates of 7 and 8 per cent respectively are trading around 3.45 per cent and 4.10 per cent. They say the 10-year bonds offering 9 per cent coupon rates are trading a little above 5 per cent. Bankers say that the bonds of all the three tenors carrying higher coupon rates are also trading at very low prices.