KARACHI, Sept 24: Institutional investors, including insurance companies, have so far not shown any interest in the long-term bonds that the government will sell in the first week of October. This has prompted the State Bank to impose a ceiling on direct buying of these bonds by such investors so that they refrain from distorting the yield structure in the next auction due in the first week of October. The ceiling has been put at Rs10 million, which means no institutional investor would be allowed to bid for the long-term bonds of a single tenure worth more than this amount.

But senior bankers say banks themselves are very much keen on investing surplus money in these bonds. That is why the effective yield on 10-year Pakistan Investment Bonds has already shot up by one percentage point within one week. The government on Thursday last announced that it would sell Rs50 million PIBs in the next quarter and that Rs25 billion bonds will be auctioned in October alone.

According to the rules governing sale of PIBs trading in these bonds starts from the day the announcement is made about the next auction on “when issued” basis. That is the primary dealers or the banks designated to sell government securities start selling the bonds with the understanding that the bonds would be made available when they are issued. Bankers say for the last one week this type of trading is taking place primarily among the banks.

Senior bankers say whereas banks are sure the next auction of the bonds due on October 4 will improve the yields institutional investors, including insurance companies, are just calculating how much increase could be expected. They say the yield on 10-year PIBs from the next issue has risen by at least 70 basis points — from 5.60 per cent when the announcement of Rs50 billion jumbo issue was made last Thursday to 6.30 per cent on Wednesday. They also say that the yield on five-year and three-year PIBs of new issue has also gone up by 85bps and 65bps, respectively, from 4.40 to 5.25 per cent and from 3.50 to 4.10 per cent. “But these bonds are not as popular with the banks as those of 10-year that are literally selling like hot cakes in the secondary market,” says treasurer of a local bank.

Institutional investors, including insurance companies and those corporate bodies that manage pension and provident funds, say they are waiting for the right time to start buying these bonds.

“I personally think the yield on 10-year bonds will move up gradually from X level to Y level in the next three auctions due in October-December,” said head of investment at a private insurance company who declined to be named. “That is why our company has adopted a wait-and-see policy,” he said implying that purchasing 10-year bonds on when issued basis does not seem as beneficial as buying them directly in the upcoming auctions.

Historically insurance companies have been among key buyers of long-term bonds but lately they showed some interest in stocks as well. Executives of insurance companies say the announcement of a jumbo issue of Rs50 billion bonds to be auctioned in next three months has renewed their interest in these bonds.