PIBs’ yields slide on hopes of bigger rate cut in coming months

KARACHI: The government raised Rs83 billion through the auction of fixed-rate local currency bonds on Thursday, falling short of the Rs200 billion target, indicating a reduction in its borrowing needs.

The yields on the short tenors of Pakistan Investment Bonds (PIBs) dropped as traders anticipate a significant rate cut from the State Bank of Pakistan (SBP) in the coming months, due to falling inflation.

The cut-off yield on a three-year PIB decreased by 335 basis points (bps) to 12.9 per cent, the lowest since March 2022. Similarly, the yield on a five-year paper reduced by 190 bps to 13.4 per cent, the lowest level since November 2022, while the 10-year bond yield stood at 13.2 per cent. The government rejected all bids for the 10-year bond at the last auction held on July 31.

Analysts have noted that the amount raised via the PIBs auction was lower than the original target, as the government had rejected all bids in the T-bills auction held on Wednesday. Consequently, yields on PIBs have fallen significantly, indicating an improvement in the government’s liquidity position.

A two-year zero-coupon bond was issued for the first time at a cut-off yield of 13.98 per cent, which was much lower than expected. In the past year, the bond rally has led to the three-year bond yield falling from 21 per cent to 12.9 per cent, the five-year yield dropping from 18 per cent to 13.4 per cent, and the 10-year yield declining from 16.6 per cent to 13.2 per cent, according to a note from Topline Securities.

Samiullah Tariq, the head of research at Pak-Kuwait Investment Company, said that the latest PIB auction and the rejection of T-bill bids by the government on Wednesday, along with the fall in secondary market yields on Thursday, signal higher liquidity in the system and lower borrowing requirements for the government.

Analysts anticipate a significant interest rate cut in the upcoming SBP monetary policy meeting scheduled for November 4.“Investors are expecting a rate cut and are locking yields in anticipation,” Tariq said.

The global benchmark, the US Federal Reserve, lowered interest rates by 50 basis points on Wednesday, and additional reductions are anticipated in the upcoming months, according to forward guidance. According to analysts, the economy is predicted to follow a similar path, with falling inflation opening the door for lower interest rates, which should boost growth.

The SBP cut its benchmark interest rate for a third consecutive meeting last week to boost economic growth amid easing inflation pressures.The SBP lowered the policy rate by 200 basis points to 17.5 per cent, the lowest level since January 2023.

The rate reduction follows August’s single-digit inflation, which was caused by a high base effect, declining food prices and a comfortable external position.Headline inflation slipped to 9.6 per cent in August from 12.6 per cent in July, continuing its downward trend, while core inflation fell to 11.9 per cent from 14.1 per cent.