Shehbaz Sharif’s PM bid boosts Pakistan’s dollar bonds

LONDON: Pakistan’s sovereign dollar-denominated bonds rallied in advance of weekend elections for prime minister, Tradeweb data showed on Friday.

The 2027 maturity gained the most, rising around 1 cent to trade at 77.3 cents, Reuters reported. Pakistan’s newly-formed ruling alliance nominated Shehbaz Sharif as prime minister in an election scheduled for March 3, and his bid is expected to succeed.

The country’s embattled economy has a narrow path to recovery, and a crucial IMF agreement expires on April 11. The premium demanded by investors to hold Pakistan’s international bonds over safe-haven US Treasuries has tightened to 955 bps - its lowest level since May 2022 and dipping below the psychological 1,000 bps threshold, according to data from the JPMorgan EMBI Global Diversified Index.

Lat week, the Bank of America Corp (BofA) upgraded its outlook for Pakistan's dollar bonds, citing reduced political uncertainty and potential credit rating upgrades. BofA raised its recommendation to overweight from marketweight, with a fair value range of $70-75 for the bonds maturing in 2036 and beyond. The bank said the political risks related to the elections were easing, as the new government will likely to secure a deal with the International Monetary Fund (IMF) to address the fiscal and external imbalances.

BofA also initiated a trade to buy Pakistan's 2026 bonds, with a target price of 83 and a stop loss of 69, expecting them to benefit from the likely repayment of the $1 billion bonds due in April. The repayment would support the whole curve, but especially the 2025-2026 segment, which could see further bull-steepening.

The longer-dated bonds could also gain from the expected progress with the IMF program, which could lead to gradual rating improvements, as suggested by S&P Global Ratings, which affirmed Pakistan's B- rating with a stable outlook last week.

Barclays also maintained its overweight rating on Pakistan's sovereign dollar bonds, saying the new government is unlikely to default on its debt obligations despite economic challenges. The British universal bank said Pakistan's foreign reserves have improved and the repayment risks are low, even as the country faces a daunting task to secure a new loan from the IMF. —News Desk