Pakistan’s bonds rally to highest level in over a year

KARACHI: Hopes that more international financial support is on the way lifted Pakistan’s government bonds to their highest level in as least 15 months on Monday.

Pakistan’s debt strains remain but its bonds are now nearly double their level they were in late May due to optimism around support from the International Monetary Fund (IMF).

The 2036 dollar-denomiated bond rallied the most, gaining 2.4 cents to trade at 57.76 cents on the dollar. The 2025 maturity gained just under 2 cents, lifting it to 82.37 cents on the dollar, its strongest level since May 2022.

The latest leg of the rally, which began last month, was sparked by hopes that an election scheduled for February will provide political stability and enable some economic certainty. An agreement last week to unlock $700 million of IMF funding has also buoyed the country’s bonds.

Meanwhile, the lost some of its trade competitiveness in October as it appreciated against a basket of major trading partners' currencies, data from the central bank showed. The Real Effective Exchange Rate (REER) index, which measures the value of the rupee against a weighted average of several foreign currencies, rose to 98.6 in October from 91.7 in September, according to the State Bank of Pakistan (SBP).

A REER below 100 indicates that the country's exports are cheaper and imports are more expensive, giving it an edge in international trade. A higher REER means the opposite. The REER increased 7.51 percent month-on-month in October, but declined 2.9 percent year-on-year, when it stood at 101.57.

The Nominal Effective Exchange Rate (NEER) index, which measures the value of the rupee against the same basket of currencies without adjusting for inflation, also increased 6.5 percent month-on-month in October to 39.18 from 36.79 in September. The NEER fell 21.46 percent year-on-year from 49.89 in October 2022.

The REER and NEER are calculated using the trade weights of 37 countries, which account for 90 percent of Pakistan's trade flows. The rupee continued to rise against the dollar on Monday due to exporters' dollar sales and optimism about the country's economy following Pakistan's deal with the International Monetary Fund for the next loan tranche.

In the interbank market, the rupee closed at 285.97 to the dollar, compared with the previous close of 286.50. The localunit increased by 0.19 percent against the dollar during the session. The local currency gained 75 versus the greenback in the open market. According to rates released by the Exchange Companies Association of Pakistan, the rupee was trading at 287.50 for selling, compared with 288.25 on Friday.

“Despite the drop in forward premiums, exporters are returning to the market to sell dollars, hoping that the rupee will strengthen further in the coming days,” said a currency dealer. The rupee is supported by better supply and an improved economic outlook, the dealer added.

The currency market prediction is that the rupee will rise to approximately 282 per dollar, at which point the SBP will recommence purchasing dollars. The rupee will remain strong due to positive news flows such as multilateral funding and IMF executive board approvals, according to a dealer.