KARACHI, Nov 5: The State Bank on Wednesday kept the yields on long-term government bonds almost unchanged allowing a negligible decline in the same.
This means that either the bond yields will rise sharply in December 2003 or the rates of return on national saving schemes (NSS) will further go down in January 2004. Policy makers can also strike a balance between the two: they can let the bond yields rise nominally and make a modest cut in interest rates on fixed income accounts and saving certificates of NSS.
Senior bankers say the SBP sold around Rs26.6 billion Pakistan Investment Bonds (PIBs) in Wednesday auction against the target of Rs15 billion but still lower than the demand of Rs44 billion.
They said the cut-off yields on the most popular 10-year bonds carrying a coupon rate of 8 per cent remained almost unchanged at 6.23 per cent down only two basis points from the last cut-off of 6.25 per cent. They said the State Bank generated Rs11 billion by selling 10-year bonds against the target of Rs8 billion — but just half the total demand of Rs21 billion.
The SBP sold about Rs9.8 billion five-year bonds that offer a coupon rate of 7 per cent against the target of Rs5 billion but less than the total demand of Rs14 billion. It also raised Rs5.8 billion through sale of three-year bonds that carry a coupon rate of 6 per cent against the target of Rs2 billion but still lower than the demand of around Rs8.8 billion.
Bankers said the cut-off yields on five-year and three-year bonds fell slightly — by three basis points and six basis points respectively to 5.12 per cent and 4.09 per cent.
HIGHER SALE: Senior bankers say the SBP sold government bonds worth about Rs26.6 billion against the target of Rs15 billion was that it had to stick to overall sale target of Rs50 billion in three months. In the middle of September the government had announced a jumbo issue of Rs50 billion of PIBs and the SBP had told its primary dealers that the issue would be sold in October- December. The central bank had also informed the primary dealers that bonds worth Rs25 billion would be sold in October; Rs15 billion in November and of Rs10 billion in December. But it had sold only Rs7.9 billion bonds in October leaving a left-over of Rs17.1 billion.
In Wednesday auction the central bank sold part of this left-over issue of PIBs indicating that in December too it would sell government bonds in excess of the monthly target to complete the sale of Rs50 billion bonds in three months.
NSS RATES: Senior bankers say since the SBP now has to sell only Rs16 billion bonds in December to complete the jumbo issue target of Rs50 billion there is very little room left for the government to increase the yields on the bonds. And if the bond yields do not rise sharply the government will have to lower the rates of return on NSS substantially to bridge the gap between the two according to the formula that the government has agreed with the IMF to apply for this purpose.
According to that formula the average yield on PIBs of three- year, five-year and 10-year over the last six months has to be brought at par with the net compound interest rate on NSS of three-year, five-year and 10-year — or gross compound interest rate net of withholding tax and Zakat.
CREDIBILITY: Senior bankers say that by selling about Rs26.6 billion bonds on Wednesday against the monthly auction target of Rs15 billion the SBP has also made an attempt to restore its credibility that received a dent in the last fiscal year when it had missed the sale target of the bonds.
Bankers say restoration of credibility will help the SBP run the financial system more systematically and allow primary dealers to play role their role in development of a secondary market for public debt. They say meeting the jumbo issue targets will also help the market establish a long-desired — but still illusive long-term yield curve. That in turn will help corporates price their debts accordingly.
MONETARY POLICY: Keeping the yields almost unchanged — rather a little low — on PIBs was necessary from the SBP point of view because an increase in the yields would have been misinterpreted as a prelude to tightening of monetary policy.
“This is yet another clear signal that the SBP wants to see the interest rates stable — at least for the time being,” said a local bank treasurer.
The central bank has kept the discount rate unchanged at that level for the last one year insisting that it shows that its monetary policy stance is intact.
But the weighted average yield on benchmark six-month treasury bills fell from 6.3 per cent to 1.6 per cent between November 16 2002 (when the discount rate was revisited) and September 17 (when these bills were last sold by the SBP).
Senior bankers say this huge fall of 470 basis points in the T-bills in one year has left the discount rate redundant making it a penal rate for the banks that run short of liquidity and have to borrow from SBP — rather than the anchor of the monetary policy.