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Thursday June 20, 2024

PIB sale falls short, yields dip on shorter maturities

Bonds with terms of 15, 20, and 30 years did not receive any bids

By Our Correspondent
April 17, 2024
A foreign currency dealer counts US dollar notes at a currency market in Karachi on July 19, 2022. — AFP
A foreign currency dealer counts US dollar notes at a currency market in Karachi on July 19, 2022. — AFP

KARACHI: The government raised a modest Rs6.8 billion from the sale of fixed-rate Pakistan Investment Bonds (PIBs) on Tuesday, a fraction of the Rs190 billion target, as yields on medium-term declined.

The cut-off yield on a three-year bond declined by 13 basis points (bps) to 16.6500 percent. At 15.4800 percent, the yield on a five-year note decreased by 1 bps. However, the yield on a 10-year paper remained unchanged at 14.35000 percent.

Bonds with terms of 15, 20, and 30 years did not receive any bids.“The government is raising a small amount and maintaining yield in the bond auction. This signals that it doesn’t want to borrow aggressively at these high rates,” said Muhammad Sohail, the CEO of Topline Securities.

The government borrowed Rs4.66 trillion from banks between July 1, 2023, and March 29, 2024, to meet its financing requirements, according to the latest data from the State Bank of Pakistan. The government borrowed Rs2 trillion in the same period last year.

The government borrowed less from the PIBs auction. Still, it will need to determine whether it can cover the deficit by borrowing more money by selling market Treasury bills, whose auction is set for Wednesday, April 17. The outcome of the T-bill auction will provide insight into investor expectations for the impending monetary policy announcement due on April 29. Markets and analysts are divided on whether the SBP will cut interest rates in April or June because there is a possibility that the central bank will do so after the finalisation of the new International Monetary Fund loan programme. The real interest rate turned positive in March, which suggests a rate cut may be on the horizon.

However, amidst the ongoing tensions in the Middle East and the potential surge in global commodity rates, mainly petroleum prices, the SBP may delay monetary easing.

It should also be noted that fuel prices have a secondary effect on other items of the consumer price index (CPI) too i.e. food mainly due to an increase in transportation costs, and also on core segments. Hence, the overall impact on CPI is bigger and longer than simply looking at the change in the transport index.

The CPI inflation eased to 20.68 percent in March from 23.6 percent in the previous month. The SBP increased its average inflation forecast for the current fiscal year to 23–25 percent from a previous projection of 20–22 percent in January because of growing gas and electricity prices.The World Bank projects that inflation will average 26 percent in the current fiscal year, then drop to 15 percent in the next year and 11.5 percent in 2026.

The coming days will be critical in deciding if a rate cut in April is possible or if the SBP's Monetary Policy Committee will exercise greater caution and defer the rate cut until its June meeting.