PIBs’ yields ratchet down on rate cut outlook

KARACHI: Yields of long-term Pakistan Investment Bonds (PIBs) fell up to 46 basis points as investors on Wednesday aggressively participated in the auction with tamed inflation vividly indicating a central bank’s potential move ahead to soft monetary stance.

The State Bank of Pakistan’s (SBP) data showed that cut-off yield for three-year PIBs was down 46 basis points (bps) to 11.59 percent. Cut-off yield of the five-year bonds was down 41 bps to 10.99 percent. The yield on 10-year paper fell 15 bps to 10.85 percent.

Atif Zafar, an analyst at Topline Research said the auction was the first after the release of the February inflation numbers. “The lower-than-expected inflation number has fueled speculation over a possible policy rate cut in Mar-2020,” Zafar said. “As a result, aggressive participation was witnessed in the PIBs auction with total participation of Rs425 billion.”

The SBP raised Rs110 billion in the auction against a maturity of Rs389 billion. Analysts said yields usually follow interest rate expectations. They believe that the SBP might step up efforts to lift sluggish growth by slashing interest rates from a decade-high of 13.25 percent as annual consumer inflation eased to 12.4 percent in February from 14.6 percent in January.

Pakistan’s growth decelerated to 3.3 percent during the last fiscal year from 5.5 percent a year earlier. The growth is projected to further fall in the range of 2.5 and 3 percent. The SBP’s monetary policy committee is scheduled to review its policy stance sometime in March.

Analysts said financial markets are pricing in 25 to 50 basis points cut in the policy rate this month following the inflation reading. The central bank kept the policy rate unchanged in last monetary policy that was announced in January.

February national consumer price index inflation data brought real interest rates back into the positive territory. “We see real rates crossing 325 basis points mark in March,” brokerage Alfalah Securities said in a report. “For next month, we expect inflation reading (estimated 10.5 percent) to fall below the central bank’s average inflation projection of 11-12 percent. The decline would primarily be due to the high base effect.”

The brokerage said improving current account deficit, weak international oil prices and ongoing global easing trend suggest “there is ample room for a rate cut in March 2020”. Zeeshan Azhar, an equity research analyst at Foundation Securities, however, expects the central bank not to lower interest rates in the March monetary policy statement (MPS).

“It is too early with only 1 month of low inflation to form the basis for a rate cut,” Azhar said. “However, we feel that in the May MPS, the SBP will cut rates by 50bps as we expect lower inflation numbers in March and April.”